Investors Who Grow Impatient Shoot Themselves In The Foot
American investors, both professional and amateur, have become a cranky lot with little loyalty to the stocks and mutual funds they buy.
Back in the 1960s, the average holding period for a stock on the New York Stock Exchange was eight years. Today the average is just nine months.
Mutual fund investors used to hang onto their funds for as long as 16 years on average in the 1950s; now they hold only for an average of four years. Investment researchers say this hyperactivity hurts the average investor’s returns.
Higher turnover
Some researchers speculate that the big increase in availability of information about stocks has made investors more active in recent years.
Behavioral researchers have shown in studies that more information increases an investor’s confidence, leading to more decisions to buy and sell.
The ubiquity of published short-term performance figures may also influence investors. Seeing the results of your investment compared to others on a quarterly, monthly, and even daily basis may encourage more frequent trading.
Fund traders lose
Those who hang onto their mutual funds for only a few years are likely to suffer subpar performance, found a study by The Brandes Institute in 2006.
Investors are likely to sell when their mutual funds go through relatively short periods of underperformance relative to competing funds.
The Brandes study found that the funds with the best 10-year performance records can have severe underperformance for up to three years.
Its analysis of the top 10 percent of domestic funds over 10 years found they beat the Standard & Poor’s 500 Index by an average of 3 percent per year.
However, some of those funds had single-year performances of as much as 37 percent below the S&P 500. The worst three-year returns for the funds ranged from 1.2 percent to 20.4 percent below the index. Similar results were found when studying international stock funds.
Investors who gave up on their funds during those periods of underperformance missed out on stellar 10-year returns.