Even in the Best Fund, Behavior Hurt Investors

What if you invested in the best mutual fund of the past decade – how would you have done?

It depends what you did.

The CGM Focus Fund was the top US stock fund over the past 10 years. I have no idea if it’s a good fund or not, but it did better than the others. 10 year average annual returns were about 18% – not bad for a lost decade.

But, you say, that’s only if you invested 10 years ago and stayed put.

Unfortunately, investors didn’t. Morningstar calculates investor returns by analyzing flows in and out of the fund. Take a guess at what you think the 10 year average annual return was for investors.

When to Buy and Sell

Investors always have reasons to invest in a fund and take money out. Some reasons are better than others.

They may purchase shares as part of an automatic monthly purchase plan, or they may buy shares because they saw how the fund did recently and they want on board.

They may sell shares because they need money (or want to rebalance), or they may sell because they think the manager lost his magic touch (or the world is coming to an end).

On average, it seems like good reasons for buying and selling (automatic purchase plans, rebalancing, spending) would not come up at the worst possible time. Over a 10 year period, sometimes timing would be great and sometimes it’d be horrible.

The Cost of Behavior

Investors in the best fund of the decade either have very bad luck or very bad behavior. Investor returns for the 10 year period were roughly -11% per year. That’s a difference of 29% per year. Missed it by a mile.

I’m not saying they’re bad people. I truly sympathize and wish everybody participated in more of the gains.

Each year from 2008 to 2002, investors did worse than the fund. Every year. And averaged out over 10 years. That’s not bad luck.

Not everybody jumped in and out at the wrong time, but it happened enough to mess up the average.