Good morning,

 

The annual Morningstar ‘Mind the Gap’ study caught our eye last week as it details what is often referred to as the difference between investment and investor returns. It is based on US investors, but we believe it has some useful points from an Irish perspective. For example, some investors have lost nearly 15% of potential gains by falling into the trap of mistiming their trades. Even though mutual funds and ETFs have achieved an average return of 7.3% annually over the past ten years, studies show the average investor only captured 6.3%. This shortfall is often driven by emotional buying during market rallies and panic selling during downturns, such as pulling investments in 2020 during the market downturn and missing the subsequent rally. Sector equity funds see the largest gaps in returns due to this behavioral bias.

 

However, those who embrace more consistent strategies like multi-asset funds tend to have much better outcomes. Funds which handle strategies such as rebalancing and asset allocation automatically allow investors to stay the course and avoid costly, behavioral mistakes. Disciplined, long-term investing pays off far more than attempting to time the market.

 

While investors are often encouraged to seek out low-cost funds, studies have shown that fees aren’t as strongly correlated with performance gaps as volatility is. High-volatility funds create larger return gaps, as investors are more likely to trade based on short-term market swings, missing out on long-term gains. Plenty of food for thought.

 

As always, if you wish to discuss anything in further detail, please do get in touch.