New Data Shows How Investors Fare

(NewsUSA) – How investors plan the sales and purchases of the mutual funds they own can be almost as important as which ones they buy. Many investors suffer from poor timing and poor planning, frequently making the mistake of thinking that the recent past will repeat itself. Investors often choose funds based on their past performance, buying too late and selling too soon. As a result, they lose money by investing in highly advertised hot funds or fleetingly popular sector funds. To capture how the average investor fared in a fund over a period of time, Morningstar recently began providing new data for openend mutual funds and exchange-traded funds. The new measure, called Morningstar Investor Return, estimates the return earned

collectively by all the investors in a fund. “Investors know they should hold diversified portfolios, but many chase past performance,” said Don Phillips, managing director of Morningstar. “For example, if most investors bought a fund at a high point and sold in a trough, that fund’s investor return would be lower than its total return. Similarly, a fund’s investor return might be higher than its total return if investors, in aggregate, timed their purchases and sales astutely.” Investor return accounts for all cash inflows and outflows from purchases and sales and the growth in fund assets. While a fund’s official returns state how well it has performed, those numbers do not explain how the individual shareholder has fared. Investor returns calculated across

all the funds at a particular fund company provide a broader view of how well the fund company has done to educate investors about proper investing behavior. “Fund companies don’t have complete control over how investors use their funds, but that doesn’t mean they can’t exercise any control,” Phillips said. “Fund companies can influence investor behavior through fund design, the timing of launches and closings, marketing efforts and shareholder communications.” To avoid poor results, experts say investors shouldn’t use performance as the single deciding factor when choosing their investments. Instead, they should measure a fund’s performance against its category peers, determine their tolerance for risk and diversify their assets.


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