Here’s a question most investors never think to ask. You know the total return your fund achieved. But do you know what return you actually made from it? A video on the Bloomsbury Wealth YouTube Channel.
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Transcript: Robin Powell & Jeffrey Ptak/ Chief Ratings Officer at Morningstar
Robin Powell: Here’s a question most investors never think to ask. You know the total return your fund achieved. But do you know what return you actually made from it? They’re not the same thing. In fact, for the average investor, there’s a persistent and substantial gap between the two. Jeffrey Ptak is Chief Ratings Officer at Morningstar and the driving force behind its Mind the Gap research.
Jeffrey Ptak: “A total return assumes an initial lump sum investment that’s held to the end of some time horizon. But that’s not how the world works in reality. We know that our cash flows, the timing, the magnitude, it can be irregular. And so what we’re trying to take into account is the timing and the magnitude of those cash flows in order to estimate the average dollar’s return. And that’s the essence of Mind the Gap. What we found in our most recent study, which ran through the end of 2024, was there was a 1.2% annual shortfall between the return to the average dollar and those funds’ total return.”
RP: 1.2% a year might not sound dramatic. But compounded over a decade, it represents a significant chunk of your wealth — and it’s entirely self-inflicted. So what’s actually driving it? Jeffrey Ptak points to one factor above all others. The more a fund moves around in value, the more it unsettles investors, and the worse their timing becomes.
JP: “ It pushes our buttons and so I think that the quintessential example of that is the investors that buy high and sell low. Usually I would say it’s more nuanced than that. There have been some very well chronicled episodes where we’ve seen manias around particular strategies, and we see an enormous amount of capital that piles in right near the peak and then performance rolls off right then. In situations like those, the return of the average dollar is going to be terrible, and there’s going to be an enormous gulf between that return and the fund’s total return. Usually it’s not quite as stark as that, but the reason why volatility has been a contributor in the research that we’ve done is just those fluctuations push investors’ buttons, and it might lead to more impulsive behaviours, like rushing in as a fund is on its ascent and then maybe bailing out as performance reverts.”
RP: So we know what the problem looks like. Volatility rattles us, we act on impulse, and we erode our own returns. The obvious answer is simply to do nothing — to stay invested and let the fund do its job. But as Jeffrey Ptak explains, doing nothing turns out to be surprisingly hard. And not just because of our own psychology.
JP: “I think also we have to focus on sort of imperatives. Within the industry in particular, there are strong incentives to be perceived as decisive, to be taking action and earning your keep as it were. And so that also can act as a catalyst for decisions, for action. When you take those things together, what you end up with is a lot of motion, a lot of action. Whereas I think if people try to keep things as still as they can, it’s all predicated on coming up with a very sound plan for your circumstances, considering your objectives and risk parameters, and then allocating appropriately.”
RP: Morningstar has been tracking the Mind the Gap findings for years. And despite lower costs and easier access to good funds than ever before, the gap stubbornly refuses to close.The reason is simple. Every time you react to a market wobble, or tinker because it feels like you should be doing something, you’re making it wider. The investors who capture the most from their funds aren’t the most active. They’re the most patient.
Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.
