Let’s pretend for one second that we are living in an alternate investment world. A world where successful investing is counterintuitive. Unlike, say, an action movie, our investments are very boring. Our portfolio is loaded with steady-Eddie balanced or allocation funds that are well diversified between stocks and bonds. In addition, our portfolios are short on sexy tech or aggressive growth investments. After all, these are very volatile times.
Recently, several studies conducted by Morningstar have suggested that investors in steady funds tend to stay on course far longer than investors who own more aggressive investments. These studies have further suggested that investors tend to have terrible timing when it comes to buying and selling their investments, and the more volatile the investment, the worse their timing. One obvious answer is psychological. According to Russ Kinnel, Morningstar’s director of manager research, “investors do better is steady-Eddie balanced funds because they don’t chase performance to their detriment. They don’t get the FOMO (fear of missing out) from seeing an investment go up 60% and thinking they better get in”. In addition, “they don’t have to panic when a low risk balanced fund falls a modest amount”.
One way to analyze how well or poorly investors trade is to examine their investor returns, which calculates the impact of an investors true return in a fund compared to the funds conventional return numbers. According to Morningstar’s “Mind the Gap” report, over the last 10 years ending 12/31/21, the most volatile single sector categories such as technology and energy had the widest gap between what the funds produced and what investors actually earned due to poor timing/trading. In contrast, more diversified and balanced portfolios had the narrowest gap. This, perhaps, is the biggest reason why investors in steady funds tend to stay the course longer.
Our alternate world would suggest that there seems to be nothing wrong with being invested in boring, predictable, well diversified funds. I am not suggesting for one minute that portfolios should not include more aggressive, “sexy” funds. I am, however, making the point that the nucleus of every portfolio should consist of the boring investments and have the aggressive/sexy pieces sprinkled around it in complimentary percentages. In addition, all funds should be held for the appropriate amount of time and not traded based on short-term market fluctuations. After all, it’s not timing, but time that delivers long-term consistent results.
Allen Minassian
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