digest
Short Summary
Main recommendation: Avoid performance chasing by buying and holding a portfolio and strategy you can stick with through volatility, rather than moving money based on recent returns. Ben Felix argues that investors' timing mistakes, not fees alone, create a large gap between investor returns and fund returns.
Key Points
- Investors typically buy into investments after strong gains and sell after declines, creating a performance gap of roughly 1.5% to 2% per year, depending on the source.
- The gap is much larger for volatile, specialized, and speculative funds, such as NASDAQ (5.3% from 1973 to 2002) and sector funds (4.38% over the decade ending December 2022).
- Investors extrapolate recent returns, expecting strong recent performers to keep winning and poor performers to keep losing, which is usually an error.
- Factor-based returns explain most diversified fund performance; poor factor stretches push valuations down and expected returns up, while strong recent performers often load on factors that are now expensive.
- Selling after a decline appears to contribute more to the performance gap than buying after gains, at least in some studies.
Details Worth Noting
Concrete instructions:
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Build a portfolio and investment strategy you can stick with, including being able to tolerate its volatility, especially downside volatility.
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Avoid being distracted by attention-grabbing recent returns of other investments.
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Do not sell after a decline or buy after a strong run; treat recent performance as a weak signal for future returns.
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Cathie Wood's ARKK fund is an extreme example: investors earned double-digit negative dollar-weighted returns on average, while the fund's time-weighted returns were positive from inception to May 2023.
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The return gap tends to be larger for growth-oriented funds than for value-oriented funds.
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Fees matter, but the speaker argues that timing losses can exceed the cost of owning a high-fee active mutual fund.
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Beating the market is hard, but beating the average dollar invested in the market is relatively easy if performance chasing is avoided.
Bottom Line
Your own timing decisions can cost you more than fund fees, so a disciplined, stick-with-it strategy is the most reliable way to close the gap between investment returns and your actual returns.
