Mutual funds far outperform mutual fund investors

Why the average mutual fund gets better returns than its average investor

Index funds, and most ETFs, are based on passive strategies where low-costs should ensure that investors do better. But if investors are using ETFs and index strategies to make tactical investment decisions—tilting their portfolio to what they see as the “right” thing for now—the investor return numbers are proof that average investors only make those moves late.

Indeed, Morningstar research shows that investors do a good job of picking mutual funds, but a poor job in timing their moves between asset classes. 

As Kinnel noted, the bigger gap between fund and investor performance was no surprise. “Fund flows were going in all the wrong directions entering 2013. Investors were buying bond funds, selling U.S.-stock funds, and buying emerging markets. We know now that that was exactly wrong,” Kinnel wrote in a Morningstar commentary. “… That’s not to say that most people were going the wrong direction. In fact, most fund investors are rather patient folks who don’t make big moves from year to year. But those who did once more showed how hard it is to time the markets.” 

DYI Comments:  The shorter term your perspective is the lower your return will be.  In other words short term trading will kill off performance faster than a New York minute.  What DYI attempts to do is align our asset allocation based on historical valuation whether they be high or low.  Then we sit on that allocation for months only changing that allocation when valuation change.  No predictions are required simply increasing or decreasing along with the valuation changes.  This forces the practitioner to buy low and sell high.

Currently the U.S. stock market is at nose bleed level as shown by the Shiller PE10 at 25.87.  That is why our asset allocation model for stocks is at it's lowest level for stocks as returns going forward will be poor at best [until valuations improve].

All told, stocks and REIT's are overvalued.  Gold mining companies and long term bonds are pricey but have further to run on the upside before they end their secular bull market.

The great rises and falls of the market would not occur if it were not for the average investor and institutional investors behaving as neophytes.  As value players we desperately need performance chasers and despondent sellers.  Currently the performance chasers are in charge.

DYI