The Morningstar Research Department publishes the “Mind the Gap” research report every year, which reports the difference between the total return of investors and the total return of funds through the flow of funds. Analysing the impact of time-based entry on investors by determining the average price of the fund over a certain period of time. Morningstar collect the United States’ fund data for everyone to study in the first phase.
From the overall data of the 10-year annualized return, investors can get 5.53% of the income after timing, which is 0.26% lower than the 5.79%. From the perspective of different types of assets, alternative investments, balances, and sector funds can earn excess returns. In contrast, international stocks and bonds recorded an additional loss. Comparing the five-year annualized data, the timing effect has improved, and the overall income difference is positive, 0.45%.
10-Year Annual Investor Returns by Asset Class Compared to Annual Asset-Weighted Returns
What factors affect the timing effect? Morningstar believes that volatility and fee ratio will affect the outcome of investors’ timing effects.
How does volatility affect investors’ timing gains?
Morningstar will divide the fund’s different types of funds into five equal parts according to the standard deviation. The group with the lowest volatility had a significantly higher excess return than the group with the highest volatility. The results of this survey indicate that “boring” funds operate stably and they are unlikely to provoke investor fear and greed. Therefore, when the fund’s volatility is low, the timing effect has less impact on the investor’s return.
How does the cost affect the income of investors?
The costs also clearly reflect the gap in investment performance. Low-cost funds tend to bring higher total returns and investment returns. First, the cost will be directly reflected in the fund’s return, and the cost is a factor that directly affects the investor’s return. In addition, low cost actively attracts more smart investors and institutional money. Low-cost investors have higher returns, and as the fund costs rise, the gap will increase. Therefore, cost factors play an important role in fund selection.
In a nutshell, investors may not be able to create excess returns when they time the market. From the data point of view, herd immunity may not be able to bring excess returns, investors need to think and act independently. Funds are long-term investment vehicles, and the different volatility environment and expense ratios will influence the effect of investors’ timing.