Mutual fund investors have not behaved well over the past decade.
Instead of setting long-term, diversified asset allocations and buying and holding funds that fit into that model, mutual fund investors spent the last 10 years chasing hot performers, buying them high and selling them low.
The combination of rising redemption rates, shorter holding periods and performance-chasing left many fund investors with much poorer overall performance than the funds in which they invested, according to a study conducted by Financial Research Corp., Boston.
Investor Behavior and Its Impact on Long-Term Investment Success was commissioned by Phoenix Investment Partners Ltd., Hartford, Conn.
FRC found the average three-year return for a mutual fund was 10.92%, while the average dollar invested rose just 8.7%, a 20% shortfall for the investor. Compounded over time, the gap between fund and investor returns over 10 years would be $5,160; over 15 years, it would be $12,381; over 20 years, $26,431; and over 25 years, $52,938.
Mutual fund investors are staying in long-term funds an average of 2.9 years, significantly less than the 5.5-year average holding period in 1996, FRC found. Redemption rates in 2000 were 32.1%, compared with 17.4% in 1996.
The study also found that mutual fund investors clearly poured money into funds just after they hit their performance peaks. On average, $91 billion of aggregate new cash flow went into mutual funds after their best-performing quarters, but only $6.5 billion flowed into funds after their worst quarters. Fund investors were so focused on yesterday's hottest-performing asset classes that they avoided investing in asset classes producing increasingly better future returns in 88% of the mutual fund categories maintained by Morningstar Inc., Chicago.