January 14, 2022 glacierinvest

Morningstar, a financial services firm specializing in investment research (especially mutual funds), published an article towards the end of this past summer highlighting the persistent gap between funds’ reported total returns and what investors actually earned. For the 10 years ended December 31, 2020, the gap between fund investment returns and investors’ actual returns in those funds was 1.7%. This is consistent with previous studies conducted by Morningstar and is largely the result of timing. 

Moving in and out of funds leads to higher transaction costs, potentially higher taxes, and lost returns. This sort of investing has been proven to be counterproductive time and time again. Yet so many of us continue to pursue this inferior path to returns and growth. Why? To quote my six-year-old daughter, because the alternative “is boring!” 

Stock market investing has been romanticized and entrenched in our culture over the past four decades. Many of us are overconfident and feel we can replicate the performance of legendary investors, which represent an infinitesimal segment of the population. We neither have the experience nor the resources to do so. 

Another not so obvious reason for the why is we aren’t hardwired to consume and process the amount of information investing produces from news stories to pundits to newsletters to dramatic price swings. All of this noise serves as a distraction and can really rev up our emotions, leading to irrational decision making. We’ve all experienced this in one form or another before. 

Keeping things simple is almost always the best option. Complexity often times leads to inferior results. Establishing an investment plan that incorporates proven investment principles and methodologies and sticking with it will almost always lead to better results. Working with an advisor who understands this can greatly help you in putting together a sound investment plan and more importantly can help keep you stay on track when you feel urged to deviate.    

Here’s a link to a Vanguard report discussing the value an Advisor can add for his/her clients if they implement sound, best practices in wealth management. 

For your information, I follow and implement all of these best practices in the work I perform for my clients.