SUNDAY, AUGUST 8, 2010 PERSONAL FINANCE Trying to time the market has cost investors big-time by Steven T. Goldberg T
hink you can guess the direction of the market? Surely, any fool could have foreseen the market’s collapse
after Lehman Brothers failed in September 2008. And by March 2009, stocks were so cheap that they had nowhere to go but up. Market timing seems so easy in hindsight. What’s more, plenty of professionals — including brokers, advisers and investment newsletters —stand ready to offer you guidance on when to trim your exposure to stock funds and when to boost it. A groundbreaking study by
Morningstar shows what a terrible price investors pay for market timing. During the past decade, the average investor’s return trailed the average fund’s return by 1.5 percent. And it came during a decade when the major market indices suffered losses or produced paltry returns. The study also showed with which firms clients were most likely to lose money. More on that later. Ironically, investors are good fund
pickers, the study shows. On average, investors tend to shun high-priced funds and to invest in funds that, over time, beat their category averages. On average, about two-thirds of funds fail to even match their benchmark index. But Morningstar finds that investors, in aggregate, buy above-average funds.
Bad market timing, however,
overwhelms skillful fund picking. During the decade that ended Dec. 31, 2009, the average fund of all types — including stock funds and bond funds —returned an annualized 3.18 percent. But the average investor dollar earned an annualized 1.68 percent. What are investor returns? They’re
what the average dollar invested in funds earns — as opposed to what the average fund returns. Suppose a fund that holds $10 million returns 20 percent in its first year. Attracted by those boffo results, assets swell suddenly to $100 million at the start of the second year, but the fund gains just 2 percent in its second year. The fund is still up an annualized 10.6 percent for the two-year period. But hapless investors, most of whom came late to the party, gained only an
annualized 1.37 percent and 1.61 percent, respectively. Hiring a pro didn’t appear to help.
Morningstar analyzed investor returns of institutional funds and funds sold with sales charges, both of which are typically purchased with the “help” of advisers. Measured against no-load funds, which individual investors usually buy on their own, these funds produced roughly the same poor results. “In aggregate, they’re all losing
money to poor timing,” writes Morningstar analyst Karen Dolan. Investor psychologists wouldn’t quibble with the results, but they would put a different spin on the cause. They would say that investors aren’t consciously trying to time the markets but that they rush into rising funds based on greed and sell dropping funds based on fear. So they buy high and sell low. Morningstar’s data allow us for the
TIM GRAJEK
The more volatile the fund, the more investors are likely to badly time buys and sells of fund shares.
annualized 1.83 percent. To calculate the results,
Morningstar studied monthly cash flows in and out of mutual funds. I’ve been fascinated by the subject of investor returns for years. Several other companies have made efforts to estimate investor returns, but I think Morningstar is the first to dig deeply enough into the data for me to trust the results. Volatility is the investor’s enemy. As you might expect, the more volatile the fund, the more investors are likely to badly time buys and sells of fund shares. Take Janus Twenty, which boasts a terrific long-term record but comes with high volatility. Over the past 10 years through June 30, it has lost an annualized 2.9 percent. The average investor dollar, however, has
THE COLOR OF MONEY
The hottest housing market these days? Information.
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uninformed, ill-prepared and overly optimistic about potential gain because of bad information they received and gladly embraced.
Glink has spent years covering the real estate industry, and that’s why for August I’m recommending her book for the Color of Money Book Club. Glink is also the best-selling author of “100 Questions Every First-Time Home Buyer Should Ask.” She co-authors a syndicated column, “Real Estate Matters,” that appears in The Washington Post and other U.S. newspapers. In her new book, Glink looks
back at what happened and then forward to what’s to come in the real estate market. As she reports, millions of people have seen their home values plummet, in many cases by 40 to 50 percent. One group of economists has suggested that housing prices won’t recover until 2017. But this book isn’t all pessimism. It’s also a guide to help buyers and sellers navigate the brave new world of real estate. Glink offers advice on what to do in a new era of declining home values, the changing role of Fannie Mae and Freddie Mac, fixing your credit, calculating what you can realistically afford and snagging a house through a short sale or foreclosure. She even ventures to help those still brave enough to want to buy investment property. I think you will find the section on the 10 things that have changed in real estate particularly sobering. If you’ve been looking for a home, you know that No. 1 is that you need a lot of cash to buy a home these days. Of course, the industry has long known that the more money someone puts down on a property, the less likely the person will default. In this case, an old rule is the new rule. One question I often get concerns whether to buy now because housing prices have bottomed. Some people are afraid they will miss an opportunity to profit from the housing meltdown.
But fear is the wrong emotion to drive a home-buying decision,
Buy, Close, Move In!: How to Navigate the New World of Real Estate — Safely and Profitably — and End Up with the Home of Your Dreams
By Ilyce Glink Harper Paperbacks, 304 pp. $14.99
Glink warns. Buyers often overestimate how prepared they are financially to become homeowners. In an online survey conducted by BBVA Compass, a Sun Belt-based bank, 51 percent of the people who had purchased a home in the previous 12 months said their housing expenses were more than they had initially calculated. Buy a home
before you’re ready, and you’ll end up with a home headache. “One thing
that hasn’t changed is that in order to play the real estate game well —
including buying, financing and closing on your new home — you must know the rules,” Glink writes. These are the worst of times and the best of times for real estate. It’s up to you to determine if this will also be the age of wisdom or the age of continued foolishness. I’ll be hosting a live online chat about this month’s book at noon on Aug. 26 at washingtonpost. com/discussions. Glink will join me to take your questions. Every month, I also randomly
select readers who will receive a copy of the featured book, donated by the publisher. For a chance to win a copy of “Buy, Close, Move In,” e-mail
colorofmoney@washpost.com with your name and address.
singletarym@washpost.com
Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.
Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions might be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated.
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fallen much more: an annualized 6.9 percent. Investors in high-voltage funds — such as technology and natural-resources sector funds and China funds — did even worse. By contrast, lower-risk Vanguard
Wellington, a balanced fund that holds about two-thirds of assets in stocks and one-third in bonds, returned an annualized 5.9 percent over the past decade. Wellington investors have enjoyed an annualized 5.5 percent return, losing just four-tenths of a percentage point annualized to poor timing. On average, investors in balanced funds beat the return of the average fund over the past 10 years. Investors in both U.S.-stock and municipal-bond funds, meanwhile, trailed average fund returns by an
first time to determine which fund firms made money for their investors and which lost money. You can’t blame the firms entirely, of course, because investors choose when to time buys and sells. The take-away from Morningstar’s study is as important as it is unsurprising. Choose your allocation to stock funds and bond funds based on your personal circumstances and tolerance for risk — not on what your gut or some guru tells you the market will do next. Stick to that allocation until your situation changes. In choosing funds, don’t look just at past total returns. Consider a fund’s standard deviation, a measure of its volatility. The three-year, monthly standard deviation of Standard & Poor’s 500-stock index is currently about 21. You can find a fund’s standard deviation at Morningstar. com. The average fund has a volatility ranking between 5 and 6. Use those numbers as your benchmark. Favor funds with lower standard deviations. Think long and hard before buying any fund with a higher standard deviation. If you do, remember that its returns are likely to bounce around a lot, so make sure you have the temerity to hang on during the inevitable awful times. —Kiplinger’s Personal Finance
Steven T. Goldberg is an investment adviser.
A suborbital ticket to ride
Would-be space traveler Daniel Hardin of Lighthouse Point, Fla., is preparing for his greatest adventure — a suborbital rocket ride on a Virgin Galactic spaceship. As told to Irene Klotz: How did you find out about this opportunity? About three years ago, I read stories about Virgin Galactic developing its spacecraft and selling tickets for future flights. Once I was familiar with the conditions and the cost, I didn’t struggle with the decision. What’s the attraction? I grew up with the space program and many times dreamed of what it would be like to be on board the rockets that take off from Cape Canaveral.
Is this out of the box for you? I love all kinds of air travel. I like going up in balloons. I flew on the Concorde twice. I flew around the world, just so I could fly in the new luxury Airbus A380. This will probably be my greatest adventure. What do you want from the experience? I’m doing this purely for the enjoyment and for the connection to my childhood. This is close to what Alan Shepard and Gus Grissom experienced, although it’s going to be a good bit nicer. I’m not expecting champagne and sushi while I’m floating around, but it will be very comfortable, I’m sure. Did you pay the full $200,000 cost upfront? I’ve prepaid $175,000. How can you afford it? Imade my money as the owner of an outdoor-advertising business. How did you get into that line of work? An opportunity came up with Omni Outdoor
Advertising while I was waiting to start law school. I thought I’d go learn something, and I needed the money. I ended up really enjoying it. I got a much broader education than I would have in law school. We just don’t need any more lawyers.
When do you take off? If flight tests go according to schedule, the first commercial runs could begin in late 2011 or 2012. The ride will last just a couple of hours and
you’ll be weightless for just four or five minutes. Is it worth it? For the perspective of being outside the
atmosphere and being able to see the blackness of space — yes, I think that view will be well worth it.
—Kiplinger’s Personal Finance
More from Kiplinger Go to
www.kiplinger.com for more analysis.
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