Mitigating the deep damage of market-timing errors

WE ARE our own worst enemy in investing. But in some types of funds, the tendency to buy high and sell low inflicts deeper damage than in others.

Morningstar’s report on investor returns in thematic funds starkly illustrates this. Published last week, the study reached the same bleak, albeit unsurprising, conclusion as another recently published study: Poorly timed investment decisions are a significant drag on wealth.

Over a five-year period until end-June, thematic funds generated an annualised total return of 7.3 per cent. Investors, however, earned only 2.4 per cent when the impact of cash outflows and inflows is considered. This means investors suffered a performance gap of 4.9 percentage points (ppts) a year. In contrast, the average gap in non-thematic all-equity funds was just 0.5 ppts.