Mutual fund investors run but get nowhere

Buyers lost more by actively trying to recover, study finds

February 17, 2010|By Gail MarksJarvis | Tribune Newspapers

The 2000s were that type of decade for investors as the stock market showed its fickle ways, brutalizing investors in two bear markets, then turning sweet when a rally seemed hard to believe.

Through it all, investors wrestled with choices: fleeing to safety, hunting for a mutual fund they thought they could trust or trying to recover from losses.

Now, said Morningstar Inc. director of mutual fund research Russel Kinnel, it's clear there was a lot of churn that didn't take investors far.

"People's market timing was very poor," he said.

Kinnel has analyzed how individuals hurt themselves by buying and selling mutual funds at the wrong times. He analyzed returns through the last decade, and the results show curious outcomes. Mutual funds overall, whether stock or bond funds, had better returns than the people who invested in them. The average mutual fund provided an annual return of 3.18 percent, but individual investors ended up averaging a return about half that amount, 1.68 percent.

A major reason: the ducking and weaving that investors did to try to protect their money or repair the damage they incurred.

Kinnel calculated what happened to the average mutual fund investor by charting the flow of money in and out of mutual funds. As people pulled money away from faltering funds and deposited money in others, investors missed the return they could have harnessed if they had stayed put.

The Morningstar study is like others that have showed bad timing in the effort to move money away from losses and toward profits. Although some individuals might make an astute move away from danger, they tend to have trouble finding the time and place to gain. Often, they are attracted to a mutual fund that is climbing, but they notice it after a sizable rally and deposit money just as the fund starts to sink. After pulling about $200 billion out of U.S. stock funds as the Standard & Poor's 500 index fell 38 percent in 2008, many individuals missed the more than 23 percent upturn in 2009.

Individuals frequently do the opposite of professional investors, experts note. Often, the pros sell when funds become popular and buy when they look like losers.

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