{"id":22342,"date":"2024-08-20T21:46:50","date_gmt":"2024-08-20T21:46:50","guid":{"rendered":"https:\/\/www.thinkadvisor.com\/2024\/08\/20\/why-theres-a-15-gap-between-investor-and-fund-returns\/"},"modified":"2024-08-20T21:46:50","modified_gmt":"2024-08-20T21:46:50","slug":"why-theres-a-15-gap-between-investor-and-fund-returns","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2024\/08\/20\/why-theres-a-15-gap-between-investor-and-fund-returns\/","title":{"rendered":"Why There&#8217;s a 15% Gap Between Investor and Fund Returns"},"content":{"rendered":"<div class=\"media_block\"><a href=\"https:\/\/feeds.feedblitz.com\/-\/903199166\/0\/thinkadvisor\/\"><img decoding=\"async\" src=\"https:\/\/images.thinkadvisor.com\/contrib\/content\/uploads\/sites\/415\/2023\/10\/07_Percent_AdobeStock_640x640.jpg\" class=\"media_thumbnail\"><\/a><\/div>\n<div><img decoding=\"async\" src=\"https:\/\/images.thinkadvisor.com\/contrib\/content\/uploads\/sites\/415\/2023\/10\/07_Percent_AdobeStock_640x640.jpg\" class=\"ff-og-image-inserted\"><\/div>\n<div class=\"the-advisor bullet-summary\">\n<h3>What You Need to Know<\/h3>\n<ul>\n<li>Mistimed buying and selling of fund shares drove the lag, a study found.<\/li>\n<li>Fund volatility also played a role.<\/li>\n<li>The performance gap occurred every year over a decade.<\/li>\n<\/ul>\n<\/div>\n<p id=\"first-para\">Advisors looking to persuade clients to avoid trying to time the market might point them to a new Morningstar report estimating that investors missed about 15% of their funds\u2019 total returns for the decade ended December 2023.<\/p>\n<p>Even thoughtful, steady investors can experience a lag between their total returns and fund performance, the research firm noted.<\/p>\n<p>Morningstar estimates that the average dollar invested in U.S. mutual funds and exchange-traded funds earned 6.3% a year over that period, underperforming the average fund by 1.1 percentage points per year, assuming an initial lump-sum investment. Fund holdings generated about 7.3% a year, which Morningstar calls the buy-and-hold return.<\/p>\n<p>The firm attributed the gap to mistimed buying and selling of mutual fund and ETF shares.<\/p>\n<p>\u201cIn other words, investors failed to capture around 15% of their funds\u2019 total returns, with that shortfall owing to the timing and magnitude of their purchases and sales,\u201d Morningstar said in&nbsp;its annual \u201cMind the Gap\u201d&nbsp;<a href=\"https:\/\/assets.contentstack.io\/v3\/assets\/blt4eb669caa7dc65b2\/blt7bdeff734af9c132\/66c3c58b47350719a4095645\/Mind_the_Gap_2024.pdf\">report<\/a>, released last week.<\/p>\n<p>\u201cThe gap was persistent. We found shortfalls between the average dollar\u2019s return and the average buy-and-hold return in all 10 of the calendar years that comprised the 10-year study period,\u201d Morningstar said.<\/p>\n<p>\u201cInvestors particularly struggled to navigate 2020\u2032s turbulence, adding monies in late 2019 and early 2020, then withdrawing nearly half a trillion dollars as markets fell, only to miss a portion of the subsequent rally.\u201d<\/p>\n<p>The gap reached negative 2% in 2020, Morningstar said.<\/p>\n<p>Index mutual funds, meanwhile, produced almost no gap.<\/p>\n<p>Consistent with prior findings, Morningstar found that allocation funds, which diversify assets widely across classes, produced the narrowest gap, at negative 0.4% a year. This suggests that investors have had more success using simple funds that automate routine tasks like rebalancing, the firm said.<\/p>\n<p>\u201cThat means less transacting, and less transacting appears to have conferred higher dollar-weighted returns than otherwise,\u201d Morningstar wrote.<\/p>\n<p>Allocation funds are often used in defined-contribution plans, which&nbsp;mechanize investing, avoiding the potentially large timing costs investors can incur when making large, ad hoc transactions, the firm concluded.<\/p>\n<p>\u201cConversely, sector equity funds had the widest gap \u2014 negative 2.6% gap annually&nbsp;\u2014 with at least some of that gap owing to the funds\u2019 higher volatility, which our research suggests can trip up investors,\u201d Morningstar said.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What You Need to Know Mistimed buying and selling of fund shares drove the lag, a study found. Fund volatility also played a role. The performance gap occurred every year over a decade. Advisors&#46;&#46;&#46;<\/p>\n","protected":false},"author":1,"featured_media":22343,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[1],"jetpack_featured_media_url":"https:\/\/blog.lifeinsurance-orleans.ca\/wp-content\/uploads\/2024\/08\/why-theres-a-15-gap-between-investor-and-fund-returns.jpg","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/22342"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=22342"}],"version-history":[{"count":0,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/22342\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media\/22343"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=22342"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=22342"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=22342"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}