Are you an average investor?

Date Published:02/04/2009

To many, this may sound like a strange question.Surely, all investors strive to be above average. Basic maths will suggest that some investors will achieve above average returns and the rest will achieve returns below average.
However, the question is a little more ‘cryptic’ than it appears at first glance. I’ll ask it again later.

There has been much independent academic research undertaken into the levels of return that investors actually receive.

I feel that now is a great time to share some of this with you.

Following investment fads or chasing short-term returns could prove to be a really costly mistake.

Many investors added their money to the floods pouring into various types of investment, including hedge funds, property funds or buy-to-let residential property investments.

All too often, investors make their decision on which investments to buy based on the ‘best buy’ lists. These are usually yesterday’s winners. When the best buy list changes, many investors will update their portfolio.

This pre-occupation with performance is often fuelled by industry commentators, fund groups’ marketing departments and of course the media.

It is easy for statistics based on short-term fund performance to be manipulated so that it looks as good as possible.

Christopher Traulsen, of Morningstar, the independent investment fund research organisation, states that in general, investors tend to invest into a fund after it has produced a good burst of performance and they then experience much flatter returns.

I am sure that this may sound quite familiar to many of you.

All too often, traditional investment advisers will either allow or encourage their clients to fall into this wealth destroying trap.

Further independent research undertaken by Morningstar found that in the speciality-technology sector in the US, the average annualised return over a 10-year period was 3.25%.

However, the typical investor in the fund during this period actually lost 5.04%.

This means that the average investor reduced their returns by 8.3% each year due to poor timing and inappropriate activity.

Many investors may feel that these dreadful return figures do not apply to them.

After all, the US speciality-technology sector is not invested into by many investors. This is possibly quite correct.

However, the same thing has happened in the UK.
A recent study shows that in the period from 1992 to 2003, the average annualised UK equity fund return was 6.93%.

The average investor into these funds actually achieved an annualised return of 4.91%.
Clearly, this is not good as the average return is 2% per annum lower than the average fund itself.

Again, the reason for this is simply that investors move in and out of funds, and this is generally done at the wrong time.

The picture looks even worse when you consider that these same funds were on average providing annual returns 2% lower than the FTSE-all share index. This is the index they all promised to beat!

This means that the average UK investor in these funds lost out by 4% each and every year.

All of this is particularly relevant now that investors should be looking at where to place their investment and pension funds, in order to take best advantage of the up-turn in markets which will eventually arrive.

So, back to my original question to you…..Are you an average investor?

If you were in the past, I certainly hope you won’t be in the future!

It may be worth an extra 4% each and every year.

balanced stones