Market Timing Causes Underperformance

By on July 23, 2010

Steven Goldberg, Kiplinger.com, reports the findings from a Morningstar study on the investment returns of average fund investors. The study showed that fund investors lag the average fund by 1.5% per year. Paradoxically, the study also showed investors were adept at picking funds, in that in aggregate they chose lower cost funds that beat the category averages. Goldberg elaborates:

Bad market timing, however, overwhelms skillful fund picking. During the decade that ended December 31, 2009, the average fund of all types — including stock funds and bond funds — returned an annualized 3.18%. But the average investor dollar earned an annualized 1.68%.

Goldberg on the reasons for the underperformance:

Investor psychologists wouldn’t quibble with the results, but they would put a different spin on the cause. They would say investors aren’t consciously trying to time the markets but that they rush into rising funds based on greed and sell dropping funds based on fear. So they buy high and sell low.

The article also comments on the fund complexes where investors gained and lost the most:

The biggest wealth destroyer of the past decade? Janus, where investors lost more than $58 billion. Next were Putnam ($46 billion), AllianceBernstein ($11 billion), Invesco ($10 billion) and MFS ($8 billion).

Investors made the most money at the American funds ($191 billion), Vanguard ($189 billion), Fidelity ($153 billion), Franklin Templeton ($78 billion) and Pimco ($71 billion).

Naturally, the firms with the largest amounts of money invested tended to end up at the top or the bottom of this list.

Source: Kiplinger
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One Comment

  1. 101 Market Timing Methods

    August 10, 2010 at 3:37 am

    Market timing can work, I agree with your results. Found this great list of different types of market timing systems:
    http://www.sectortimingreport.com/101-investment-market-timing-tools.html

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