Oops We Did It Again
That headline does not refer to Britney Spears’ latest escapade, but rather to the continuing propensity for Canadian investors to buy high and sell low.
Once again, owners of Canadian mutual fund units have bailed out after a market drop, while buying mutual funds in near-record numbers when the market was passing all-time highs in June and early July.
The latest numbers from the Investment Funds Institute of Canada (IFIC) show that August was a huge month for mutual fund redemptions, following the significant correction in the markets that started July 20th.
And, of course, the market fooled many people by rebounding sharply from the time of maximum worry in mid-August to rise some 800 points by the end of the month.
The Toronto Stock Exchange bottomed out at 12,848 on August 16 and rose to 13,660 by the end of the month. So anyone who sold their equity funds mid-August missed out on some of that recovery, which has continued into September.
Now, in fairness, we actually did pretty well as investors this time around, as most of those redemptions actually came out of money market funds, not equity funds, and most were corporate owners, not individuals, according to the reports from the member companies of IFIC.
Why am I not suggesting that fund investors should have sold July 13th and bought back August 16th, instead? Sure, in a perfect world, that would have been ideal.
However, no such perfect world exists. That was confirmed by a recent study conducted by Dalbar Canada Inc., a firm that studies investor behaviour, the investment industry communication and related issues.
This is different research than my Free Press colleague Randy Reynolds quoted in his column last week, but the conclusion is the same – market timing does not seem to work.
Dalbar’s 2007 Quantitative Investment Behaviour Study (QAIB) shows that mutual fund investors who buy and hold have returns that are multiples ahead of the average mutual fund investor, who buys and sells, partly in reaction to market ups and downs.
This survey shows that attempts at market timing failed dismally.
This study looked at returns between 1987 and the end of 2005. It revealed that the average retail mutual fund investor grew a $10,000 investment to only $21,422, with the majority of the sample invested in equity funds. However, money was added, subtracted, pulled to the sidelines and subsequently reinvested, not just left to grow in most cases.
If that same investor had been in a fund that matched the returns of the S&P 500 index over the same period of time, that same $10,000 would have grown to $94,555. This assumes that no additions or withdrawals were made.
The study was conducted on American investors, since the sample size is much larger, but I think the validity carries over to the Canadian side.
However, there are a few caveats. First of all, not everyone can put in a lump sum of money and simply leave it. Personal circumstances sometimes require withdrawals and, hopefully, additions to the money, over time. But the fact remains, if you can leave it and forget about it till you really need it, you will be further ahead.
Unfortunately, not every mutual fund keeps up with the market either. Hard as it is to believe, but only about 1/3 of actively managed mutual funds overcome their management fees and produce index returns or better, which is why in our practice we always look at index fund alternatives, and use active management to decrease volatility rather than bet on better returns.
The bottom line is that most of us are better off to place our long-term money into good solid, blue chip investments and let ‘em ride, ignoring the market ups and downs.
But you already knew that, didn’t you?
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays in the Winnipeg Free Press. You can e-mail him at dchristianson@wellwest.ca.