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moneysense.ca, 13/11/06
An Investor’s Worst Enemy
It turns out high mutual fund fees are not the only enemy for an investor looking for a decent return in the equity markets. The other enemy is the investor himself (or herself) who is handicapped by the tendency to chase the hot investment du jour. Consider this statistic quoted in a recent Time magazine article, attributed to Vanguard founder John Bogle:
[In] the 20 years ending in 2005, the S&P 500 index rose 11.9% annually and the average mutual fund 9.7%, but the average investor realized only a 6.9% return.
How much does trying to time the markets cost the investor? A buy-and-hold, index investor would have grown an initial investment of $1,000 into $9,142 (assuming total expenses of 0.20%). An investor in the average mutual fund would end up with $6,370 but the investor who has a motley collection of once-hot funds would only have $3,798 to show for two decades of investing. If you are keeping track, it is almost 60% less than the passive index investor.
These days investment discussions invariably turn to energy, resources and emerging markets. The chances are pretty good that these sectors will soon turn cold but investors will be predictably piling into them this upcoming RRSP season.
moneysense.ca, 13/11/06
It’s different this time.
CC,
Thanks for the post. I was thinking of a post similar to yours so I just decided to refer to yours and add my two cents of my experience so far in index investing.
CD
I’m always leery when I read about comparisons to the S&P in the last 20 years. One must realize the unprecedented growth that occurred several times in the past 2 decades. Yes, the last 20 years were great for lazy investors. But you just have to look at the 20 years previous that (1965 to 1985) to see that lazy investing had lazy returns of just 3.64% annually. On top of that, the majority of that return only occurred at the end of 1982 and the beginning of 1983. Had you sold in mid-1982 your return would have only been 1.1%.
Does the returns you mention include dividends? I find that S&P 500 returned 7.8% between 1965-84. The worst 20 year rolling returns were 6.8% between 1962-81. My opinion is avoiding fees and trading costs are even more important in a low return environment.
Going forward, it may not be reasonable to expect 12% but a diversified portfolio might return 6%-7%. If inflation stays low, I would be very happy with such a return.
What about mutual fund companies, like the new Sarbit Asset Managment, that have very competitive MER’s and are actively managed?
I completely disagree. Most financial advisors tell people to ignore the timing because it certainly helps keep the advisor’s income nice and steady.
If you sold off and sat on cash and bonds right before the dot.com crash and then poured into the market after the crash, you would’ve made a bundle (which was me). That one was a no-brainer, as many of the internet companies were making little or no money and had triple digit P/E ratios! The timing of the income trust tax ruling was an artificial phenomenon brought on by the government, but if you were lucky enough to have been sitting on piles of cash at the time, then you would have made a huge bundle in recent days (that was NOT me).
In my opinion, timing the market is what it’s all about. If you bought investments at the wrong time (just before the dot com bubble burst, or just before the tax ruling came out) you would have lost tons of money, whereas buying right after those landmark events would have netted you huge gains.