If you hate mutual fund managers, why act like one?

Posted by on May 17, 2011 in Investment Information

In the 2011 world, you are seen as being late to the game if you report on a story one hour late. Our social media world is about who gets there first- regardless of its accuracy, truth or reliability. This may work fine if you work for a tabloid website but are average investors, bombarded with daily messages to do something right now, really benefiting from this hyper-ADD world we like in?

Pre-social media research tends to say no. Its findings, on some level, reveal that some investors may act like the very mutual fund managers they hate.

Among the many grips against mutual funds is that they turn-over their portfolios too often, resulting in detrimental tax effects and higher than required fees for the investor.  One school of thought is that mutual fund (and, by extension, all active managers) are not necessarily poor stock pickers.  Instead, the poor performance of mutual fund managers may be attributed partially to improper asset allocations and too much turnover.

But when researches look at estimated turnover of investors, they find that they have just as itchy fingers as mutual fund managers. Investment Company Institute estimated that the average mutual fund investor had an average holding period of2.78 years based on redemptions rates from 1985-2005, DALBAR’s “Quantitative Analysis of Investor Behavior” estimates a hold period of 2.48 years. John Bogle estimates a hold period a little under 3 years.

It gets worse. In a study looking at the turnover and returns of day-traders from 1991-1996, the authors found a stunning 75% turnover of a portfolio annually with less than impressive results. These investors underperformed market indexes by 6%.

With technology significantly improved and costs lower for discount brokerage, it would be interesting to see if technology has merely amplified the best and worst of investor behavior.

Having warned of the itchy finger, my next post will comment on one asset class you cannot sit on too long.

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