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Switching Lanes

London Free Press

 

When you are traveling on the 401 and you get in a traffic jam, you may switch lanes to try and move along. However, you don’t make any progress – you end up in the same spot as if you had stayed in the same lane. Sometimes switching investment funds can have the same effect.

 

Staying invested for the long term is one of the key strategies used by successful mutual fund managers. Investors should look to these professionals when they are considering actively trading their mutual funds. A study done in 1997 by "Dalbar Inc.", a research firm in the United States, showed that investment return is more dependent on investor behavior rather than fund performance. A mutual fund investor who practiced a buy and hold strategy earned higher real investment returns than those who attempted to time the market by switching in and out of funds. Many studies backup the theory "what counts is your time in the market, not timing the market". Other studies have shown that rising markets last much longer than falling markets. In fact, research shows that markets rise 70 percent of the time and only go down 30 percent of the time.

 

The main problem with market timing is that not only do you have to know exactly what mutual fund or stock to buy, but you also have to know when to get out of the market or sell the stock.

 

An often published study in the U.S. says that if you missed the best 90 days of market between 1973 and 1993 you would have earned only 3 percent instead of 11.8 percent if you had stayed invested. The key findings of the this research stressed the importance of buying and holding and found that mutual fund investors earned far less than reported returns due to their investing behavior. For example, the largest U.S. fund called the "Fidelity Magellan Fund" averaged 20 percent over 15 years but the average no-load investor who switched out during times of fear and repurchased during times of hope actually had a return of negative one percent. This shocking statistic is due to the fact that in attempt to participate in impressive stock market gains, investors jumped on the bandwagon too late and then switched out of the fund during a correction. By not remaining invested for the entire period, they do not benefit from the majority of the equity market appreciation. That’s not to say that portfolios do not need repair and often-lagging funds need to be replaced. A good example is Dynamic Partners, which for a tactical asset allocation fund did a reasonable job and in 1999 earned seven percent. If an investor within the same family had wanted to have more of a growth-orientated fund, they could have switched to Power Canadian and earned 50 percent for the last year. This is an example of how a small change in your portfolio can have a huge impact in the long run.

 

The Dalbar Inc. study also showed that equity investors hold their funds for an average of three years with an advisor and an average of 13 months without an advisor. Investors without an advisor tend to chase hot funds in search of better returns and often get burnt. Moving from an under performing fund to a good performing fund based on good management principles, tax efficiency and cost efficiency may all be reasonable reasons to repair a portfolio. But trying to time the market is sorry and dangerous investor behavior, sure to be harmful to your financial health.

 

Sensible wealth building principals are predicated on purchasing excellent business with earnings and holding them for reasonable periods of time.