Invest(or) Performance Matters Most

In the how to invest section of my personal finance book, I highlighted the biggest hidden obstacle investors face in their money-making journey: the investor return gap.

Mind the Gap

Investors underperform their investments.

One twenty-two year study referenced in the book showed that index fund investors underperformed their funds by 2.72% per year, and investors in actively managed funds underperformed their funds by 1.88% per year.


Chasing performance and bad timing decisions.

Buying a hot fund and jumping ship when it hits an inevitable rough patch and trying to time the market.

We saw this last year when the average 401(k) investor underperformed the market for two reasons I explained in Fixing Your 2 Biggest 401(k) Mistakes.

Morningstar shared some more timely examples worth highlighting in Profitable Lessons from the Bad Timing of Other Investors.

Fund returns tell us which managers add value, but Morningstar Investor Returns suggest how investors capture or squander that value. Investor returns are dollar-weighted returns that show how well investors timed their fund purchases and sales. With good timing, they may earn better than the official long-term return, but with bad timing, they might lose money even in a solid-performing fund.

Profitable Lessons from the Bad Timing of Other Investors by Morningstar

The article profiled seven funds.

Key Investor Return Gap Takeaways

  1. Volatile funds with big performance swings cause investment mistakes. The article highlighted a fund that earned a 10% annualized return over the prior decade, but it posted positive annual returns of 50%, 45%, and 79% and lost 52% one year during those ten. Most shareholders missed the strongest years, but not its worst year.
  2. “Reaching for a little more yield than most funds offer often includes a big jump in risk.” A bond strategy that took more interest rate risk than its peers for more yield had two good years in 2019 and 2020, attracted new assets, and those new investors got burned in 2021 and 2022 when the fund lost money. 
  3. Beware of asset bloat. Two success stories were funds with great track records and strong investor returns. The common thread? Both closed to new investors. A fund performs well, and money flows in. Performance tails off. Sometimes it’s reversion to the mean, or an investing style falling out of favor. But sometimes it’s easier to generate good performance in a smaller and more nimble fund.

Further Reads

Stock Investing Mistakes