Morningstar Advisor - April/May 2013 - (Page 60)

Gray Matters Why Investors Lag the Returns of Their Funds By Russel Kinnel Volatility proves challenging for many shareholders. What happens when investors meet mutual funds? Sometimes, it’s a great thing. Investors find good funds and enjoy solid returns for a long time. Other times, investors have a poor experience, even in a fund with great returns. People don’t get in until after the fund has put up huge returns. Then, as often happens with any asset that has spiked in value, the fund falls flat, and impatient investors flee. 60 Morningstar Advisor April/May 2013 Big surges and then big declines spur greed and envy, then fear and anger. The more emotional investors get, the worse their decisions will be. The past two bear markets are perfect examples of these behaviors. As stock markets soared, investors bought stock funds heavily, only to see their investments plunge in the ensuing bear markets. Then, they bailed out of the funds close to the bottom, only to miss the big rebounds. Not everyone did that, of course; many investors were patient. But flow data tells us too many investors went in the wrong direction. Timing Is Off The real-world returns investors experience in the funds often don’t resemble the funds’ published returns (which are based on arbitrary time frames, such as calendar years). The difference between the two returns is often called the behavior gap, and fund

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2013

Morningstar Advisor - April/May 2013
Letter From the Editor
The Pursuit of Happiness and Financial Advice
What Strategies Do You Use to Control Risk?
Driven to Succeed for Clients and Family
How to Assess a Portfolio’s Bond Risk
Luck, Skill, and Investing
Investments á la Carte
Investment Briefs
Investing’s No- Brainers Have Costs
A Defensive Ride
Risk On/On Risk
The Risk of Being Overconfident
Year of Living Dangerously
The Risk-Parity Approach
A Guide to Mutual Funds Running Risk-Parity Strategies
What Moats Tell Us About Risk
Risk’s Wake-Up Call
Seeing Is Believing
Why Investors Lag the Returns of Their Funds
Liquidity Signals
Pump Them Up
Golden Oldies Keep on Truckin’
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Our Social Blind Spot

Morningstar Advisor - April/May 2013