Many illustrations of investment performance calculate the growth of a hypothetical investment from a given starting point. Typically there is a benchmark, such as the S&P 500 index, charted alongside for comparison purposes. The models show that had you invested a specific dollar amount, for example $10,000, you would have the initial $10,000 plus whatever growth through dividend re-investments and asset price appreciation at the end of the evaluation period. This measures an investment’s total return for the period and is based on a buy-and-hold strategy that is quite different from how most people invest.
Controlling Your Emotions?
Morningstar, an independent investment research company, compiled returns for how the average mutual fund investor did during the 2000’s. The research added a layer of analysis to the total return calculation by also tracking the cash flows in and out of the mutual fund. They wanted to see what the performance looked like if you took into account additional buys and sells in the fund during the same time frame. Then they compared the findings to the buy-and-hold strategy that mutual funds use to report investment performance. What the findings show is that most investors suffer from bad timing as they get in when prices are high and get out when prices are low. This is a reflection of how market forces can drive investor emotions and result in behaviors that cause poor relative investment performance.
Slow And Steady
Another interesting discovery is how fund companies provide different investing experiences for the average investor. The institutions that stick to fundamentally sound investment principles were proven to have better investor returns relative to total returns than those companies that use a short-term, current-trends marketing strategy to attract investors.
Financial Symmetry’s composite results for the decade were an average annual rate of return of 4.93% compared to the average annual investor return of 1.68% across all funds.
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