Market Timing Can Add to Underperformance
10-Year Annualized Returns in the U.S. Large-Blend Category
Are your clients concerned about volatility in their equity portfolio? Their attempts to time the markets probably aren’t the answer. Data from Morningstar shows that, on average, investor returns lag fund returns. A fund’s investor return includes the impact of purchases and sales of the fund. The difference between the two return measures is considered a proxy for investors’ ability to time markets. Investor returns lagged because many investors chase past performance and end up buying funds too late or selling too soon. This effect is amplified in higher volatility funds, which are more prone to periods of sharp declines that could cause investors to sell prematurely and miss a subsequent rebound.
Remind clients that they should consider a more disciplined, long-term approach to investing and avoid jumping from fund to fund, especially when faced with higher volatility.