Why Fund Investors Keep Getting It Wrong

Individual investors have a penchant to self-destruct. And the $15 trillion mutual fund marketplace is apparently one of their favorite playgrounds.

According to Morningstar, the 10-year gap between mutual fund returns and what investors actually earned rose to 2.49% in 2013 compared with just 0.95% in 2012. Put another way, the typical fund investor gained 4.8% over a 10-year period, whereas funds enjoyed an average return of 7.3%.   

Apparently, people still don’t understand the market isn’t their worst enemy; rather, it’s themselves. Impatience, lack of self-control, and knee-jerk reactions have devoured alive the investing public.

In the debate of mutual funds versus ETFs, it’s been inaccurately suggested by some fund proponents that ETFs, because of their intraday liquidity, induce people to always do the wrong thing at the wrong time. Au contraire!

A closer examination of the Morningstar fund investor statistics actually shows that undisciplined investor types will invariably find a path to financial suicide, regardless of what products they choose to buy.

Furthermore, the fairyland view that a robust asset allocation across a diversified portfolio of well-managed funds can somehow cure individuals from their self-destructive ways is a total farce. People cannot get their money right until they first get their minds right. Remember the movie “Cool Hand Luke”?

In which categories were fund investors the most proficient at not self-imploding?