Over the years, there have been significantly more and more funds that mirror after the index such as Exchange Traded Funds. If you research the internet, you’ll find countless articles, blogs and forum pages advocating the use of index funds. I had previously suggested to consider using Vanguard funds (that article can be found here: Vanguard funds in Singapore at just US$ 20,000!)
However, if you would to track the record of these index funds, you get to see an interesting picture.
Consider the Vanguard Global Equity Index (click Performance, Trailer Returns Month End). In the performance table shown below, there is a field called Investor Return which I highlighted in yellow.
Performance of Vanguard Global Equity Index
Investor Return captures how the average investor fared in a fund over a period of time and it is calculated by Morningstar. On a mid-term basis says 5 years, the tax adjusted returns of the fund and the Investor Return was was almost on par. However, on a long-term basis, say 15 years, you will notice that the Investor Return underperforms the fund’s tax adjusted return by a whopping ( 4.59 – 2.83 = ) 2.12% per annum (highlighted in red)!
Similar statistics show up for Vanguard Emerging Markets Stock (click Performance, Trailer Returns Month End) as well. Refer to the below table. In fact, for this emerging market fund, the average investors underperformed the funds’ returns both on a short-term basis and the long-term basis.
Performance of Vanguard Emerging Markets Stock
To be fair, this isn’t just happening to index fund investors. The high-flying Fidelity Magellan Fund was managed by the legendary investor Peter Lynch from 1977 to 1990. Under his management, the fund averaged an annual return of whopping 29%. Yet, Fidelity reported that the average investor in this fund lost money during that time by making emotional decisions due to adding more after strong performance, selling during downturns.
So, what can we learn from these observations?
First, be careful of what you read on the internet. Internet gives you a lot of information, however, what’s lacking is wisdom. When you hear of articles advocating for investment into a certain style or product, what you get is information, not wisdom. Wisdom comes from experience - experience in helping large number of investors and knowing what’s work and what are the things that are unlikely to work.
Second, do not focus on the trees but missed the forest. Many people focus on the low cost fee but forget that the largest most expensive fee to pay is not able to manage one’s emotions such as buying high and selling low. What is the point of saving on fees when your emotions are going to cost you heavy losses?
Third, what you read on the internet are mostly written by writers, rather than financial practitioners. Even if the writer has experience, it is usually based on their own experience which may not be appropriate as everyone is unique.
Finally, in Singapore, the government does not regulate articles written by any non-financial practitioners. That means they can say anything they like without any repercussions.
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Basically the annual Dalbar studies.
This emotions & behaviour will always be there, unless humans evolve drastically.
Our behavioural biases are evolved from our ancestors 10,000 years ago. Those who don’t quickly get emo & cut & run become dead fast and don’t get the chance to have future generations.
Even today in the Russia-Ukraine war, the Ukrainians who suffer less are the ones who quickly run in the first few days.
Long term successful investing requires the opposite behaviour. Successful investors will probably be killed in Ukraine.