What caught my eye this week.
Rejoice that at some point you began reading – or even subscribed – to Monevator.
Because while our core message to invest passively, automate your savings, and then find a different hobby is a terrible business model for an investing blog, the evidence is clear its the best advice for the average person.
Just the latest salvo to scatter the hand of fund-shuffling hobbyists comes with a new ‘return gap’ survey from data giant Morningstar [Search result].
Its annual Mind The Gap survey reports investors earned about 7.7% per year on the average dollar they invested in the decade to the end of 2020.
That is about 1.7% less per year than the funds themselves delivered in total returns over the same period.
This so-called return gap reflects the wealth destruction average investors do to their portfolios by badly trading funds.
The return gap, yah
Morningstar surveyed the US, but there’s no reason to think things aren’t the same everywhere. Probably worse, in fact, given the greater inroads made by passive investing across the pond.
It’s worth stating that return gap studies do have their critics. (The similar DALBAR study in particular has been under the cosh for years). But regardless of the specific findings, the overall takeaway is sound.
In the image below, the vertical lines for each row in the graphic help to illustrate the gap between potential and realized returns for each category:
How to mind the return gap
It’s especially notable that the the lowest return gap came with the Allocation fund category.
These are funds-of-funds like Vanguard’s Lifestrategy offering. They contain a mix of assets, and they do your shuffling for you as per preset rules.
Allocation funds work because you just lob money in each and every month, regardless of your hopes and fears.
And because you don’t see the sausage being made.
The average investor thinks bonds are too expensive or US equities are about to crash and takes action accordingly. Which would be fine if their timing was good – but it’s demonstrably not. Hence the return gap.
It gets even worse when you drill down into alternative and sector-specific funds – prime candidates for performance-chasing by both fund houses and the investors who belatedly get on the bandwagons the professionals set rolling.
Morningstar’s advice? Use index funds, lean on allocation funds to do your heavy lifting, avoid volatile sector-specific funds, and dollar-cost average to avoid taking a thousand nicks from poor timing decisions.
Have a great weekend!
On the plateau – Monevator
Compare funds: what to look for – Monevator
From the archive-ator: A mortgage is money rented from a bank – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Long delays to getting state pension being reported by many turning 66 – ThisIsMoney
Empty shelves and HGV driver shortages: Brexit eight months on… [Video] – TLDR
…with missing HGV drivers also being blamed for flu jab delays – BBC
Downing Street again hints triple lock could be watered down – Guardian
UK enjoys property sales boom as prices continue to accelerate – BBC
Oxygen shortages due to Covid are disrupting the space industry – BNN
People need a £17,465 savings pot to feel secure, says Yorkshire Building Society/CEBR report – ThisIsMoney
Products and services
28 steps to get your money into shape – Guardian
How to get the best deal on a 90% or 95% mortgage – Which
Trick to getting a market-leading 1.9% on one-year savings – ThisIsMoney
Get up to £500 cashback when you transfer your pension to ii [Offer ends 30 September 2021] – Interactive Investor
UK energy bills to rise after record surge in wholesale electricity prices – Guardian
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade
Is Chip’s new savings account any good? – Be Clever With Your Cash
Homes for sale with film connections, in pictures – Guardian
Comment and opinion
Where greatness lies – Compound Advisors
Why do we work too much? – The New Yorker
Cost versus sentimentality – Incognito Money Scribe
(Near) optimal retirement planning using machine learning [Podcast] – Rational Reminder
Cash is still king, at least emotionally – Klement on Investing
Whimsical – Indeedably
Dating finances and the lessons of lockdown [Search result] – FT
Blockchain for the rest of us mini-special
Bitcoin for Bogleheads – Accidentally Retired
An investor’s deep dive on Ether and Ethereum – Banker on FIRE
From the archive-ator – Should you own Bitcoin in your portfolio? – Monevator
Bitcoin futures roll costs are an impediment to any ETF [Nerdy] – ETF.com
Naughty corner: Active antics
Beijing’s tech sector shock casts a long shadow [Search result] – FT
Valuing China’s tech giants after the government crackdown – Musings on Markets
What shorting ETFs means for long-term investors – Morningstar
Value stocks don’t seem to be cheap for any intrinsic reason [Video] – AQR
… but beware some academics now think the Value Premium was juiced – AlphaArchitect
Oxford-Astra vaccine technology used to design cancer-fighting jab – Sky
Long-haulers are fighting for their future – The Atlantic
What’s behind the clamour in the US for false Covid cure ivermectin? – NBC
Kindle book bargains
Stuffocation: Living More with Less by James Wallman – £0.99 on Kindle
The Basics of Bitcoin and Blockchains by Antony Lewis – £2.19 on Kindle
Captivate: The Science of Succeeding with People by Vanessa van Edwards – £0.99 on Kindle
The Smartest Guys in the Room: The Fall of Enron by Peter Elkind and Bethany McLean – £0.99 on Kindle
Get a Kindle: buy one to save money and space!
American homebuyers are running towards climate change – Redfin
A cancer-quashing microbe emerges from the deep – Nautilus
What I learned renting my parents’ off-grid home on AirBnB – The Atlantic
Rural America is gearing up for a generation of change – RCM
Off our beat
Zoom dysmorphia is following people into the real world – Wired
Honesty researcher Dan Ariely retracting a study over fake data – Buzz Feed
China curbs amount of time kids can spend playing video games – Guardian
Afghan biometric databases abandoned to the Taliban – MIT Tech Review
Facebook is the AOL of 2021 – ZD Net
“Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time.”
– Warren Buffett, The Snowball
Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Freetrade. We may be compensated if you pursue these offers – that will not affect the price you pay.
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.