Morningstar recently released the latest edition of their “Mind the Gap” study, which looks at how investor’s actual returns compare to the returns of the funds in which they are invested.
Again, investors in “allocation” funds (which includes balanced funds, target-date funds, and things like the Vanguard LifeStrategy funds) had the smallest gap. To me this is entirely unsurprising. When you use a fund like that, there’s less temptation to jump around from one fund to another. The whole point is to just put it on autopilot. So that’s what people do. And it works.
And investors in sector-specific funds have a huge gap. Again not really surprising. A lot of people buying those funds are likely buying them just because of a recent bout of great performance, which is often exactly the worst time to buy. (And of course if we’re considering a naive investor like this — somebody who is just looking at the x-year return figures and picking the fund with the highest — they probably aren’t the person who is going to stick around, if ensuing performance isn’t so great.)
If you’re trying to make bets about this sector or that sector being a better bet than the market overall,
- Are You Leaving Money on the Table From Your Funds’ Returns? from Amy Arnott
Recommended Reading
- The Art and Science of Performance Benchmarking from Allan Roth
- Retirement Expenses Are Too Hard to Predict from Teresa Ghilarducci
- How Well Do Retirees Assess the Risks They Face in Retirement? from Wenliang Hou
- Why the Financial Goalposts Are Always Moving from Ben Carlson
- Investing in Home Renovations vs. Investing in Stocks from Ben Carlson
- 6 Key Things to Know About I-Bonds from Michelle Singletary
- What is Financial Well-being? from Rick Kahler
Thanks for reading!