Tuesday, November 07, 2006

Investor Return vs. Total Return

I read an interesting article in the NY times recently regarding investment return vs. total return. The article touches upon how most investors do not reap the returns that are usually published by the mutual fund companies. A large part of this is due to investor behavior. In other words, most of us are guilty of chasing performance and buying into funds that do well (see Fidelity Magellan in the 1990s, Janus in the late 1990s, international funds in the first half of this decade... are people doing the same with American Funds now?). However, by the time people buy into a fund, much of the great performance has already occurred.

The article mentions that Morningstar will soon be publishing not only total return but also investor return. This will give us a more realistic view of what performance is for a typical investor. Again, we shouldn't let these #s (investment return) dicate whether we should purchase into a fund. Rather, deciding to purchase or sell a mutual fund should be based on a number of factors, perhaps most importantly, whether or not the fund fits in with your overall assett allocation and investment plan.

Despite what academics tell us about how human behavior leads us to make poor investment decisions, it seems that collectively, we are all prone to continue to make the same mistakes by chasing performance. To behave otherwise (i.e. buy and hold), although better for our financial health, would not be very human. Fight those genes and resist the urge to chase performance and you will be in much better financial shape.
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