As a financial manager, I can tell you that there is a difference between the returns of mutual funds and the returns earned by mutual fund investors. Many investors make the mistake of assuming that the returns of a mutual fund will directly translate to their own returns, but that is not always the case.
As a review, mutual funds are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio/basket of stocks, bonds, or other securities.1 These funds are designed to provide investors with a convenient way to diversify their investments and potentially mitigate some of the risks often associated with investing in individual securities. Now that we’ve reviewed that, let’s go back to the difference between mutual fund returns and investor returns in mutual funds.
Mutual fund returns reflect the performance of the funds underlying investments, while investor returns reflect the actual returns earned by individual investors after considering fees, expenses, and the timing of their purchases and sales. The timing of purchases and sales is an important factor that has shown to affect investor returns.2 Human nature dictates that many investors make the mistake of buying mutual funds when they are preforming well and selling them when they are underperforming. This can lead to poor long-term returns, as investors are effectively buying high and selling low.
One of the most effective ways to combat the timing issue is to look at mutual funds as long-term investments instead of market timing and trading vehicles. This allows investors to focus on their overall investment strategy rather than simply chasing short-term returns. The long-term view shifts the focus on asset allocation, diversification, and risk management. By sticking to a disciplined and long-term investment strategy, investors can more effectively minimum risk while still benefitting from investment returns.3
In conclusion, each investment portfolio is constructed differently, and each portfolio will have its own unique long-term views. We look forward to continuing our goal of helping our clients accomplish their long-term financial goals.
- Allen Minassian
1. https://www.schwab.com/mutual-funds
2. https://www.barrons.com/articles/buying-selling-funds-timing-dcbeadf4
3. https://www.ameriprise.com/financial-goals-priorities/investing/strategies-to-help-reduce-investment-risk