Have you ever known someone who is absolutely committed to getting the lowest price for gas? They're willing to drive miles out of their way to save a nickel per gallon. And they derive deep satisfaction from knowing they saved 75 cents on a 15-gallon purchase.
However, what they probably don't take into account is the extra $1.50 they spent on gas to get them to that bargain service station—not to mention the extra time it cost them.
In the same way, repeated studies have found that when investors try to add to their gains and shave their losses by changing their investment strategy, they most often achieve the opposite. Recent research by Morningstar found that investors continue to miss out on about 15% of average total returns due to their poor timing of purchases and sales.1
The study spanned the decade and analyzed the performance of 25,000 U.S. open-end funds and ETFs, versus the average actual returns realized by investors in those funds. For example, the average annual performance of a fund over that period was 8.2%, while the average investor realized a return of only 7%. (This 1.2% difference represents a 17% performance gap.) Bond fund investors did even worse, capturing only slightly more than half of potential returns.
Jeffrey Ptak, a managing director at Morningstar and the report's lead author, says that this gap in performance has proved to be so stubborn, investors should think of it as a persistent cost, similar to the way they consider fund expense ratios. The main culprit for these underrealized gains isn't transaction costs, though buying and selling investments do add costs.
The problem, according to Ptak, is that when people move money in and out of funds, they miss unexpected growth. He says that investors should be deliberate about the necessity, timing, and nature of their transactions, so they are trading as little as possible. That way they will be in a better position to capture as much of a fund's return as possible.
However, that's not to say that holdings should never be adjusted. The prudent investor knows that a healthy portfolio requires periodic rebalancing for things like diversification and risk adjustment, and that this should be done under the expert care of an advisor.
This is why it is so beneficial that we work closely together. Knowing your unique situation —including income, family situation, and long-term goals— we can continue to partner with you on a plan for financial health today and a successful retirement in the future.
