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Don’t Make This Mistake

David Swensen, Chief Investment Officer of Yale University’s US$ 19.3 billion endowment fund has led Yale’s endowment fund to a 13.7% annual return since he assumed his role in 1985. Swensen is considered an authority on institutional asset allocation, and in a guest lecture in 2008, he cited a Morningstar study about retail investor’s returns from investing in mutual funds.

There are two ways to measure the performance of mutual funds and unit trusts:

  • Time-weighted Returns: Measures the performance of the fund itself and is the figure that is found on most fund prospectus and marketing materials.
  • Dollar-weighted Returns: Takes into account when the cash goes in and out of the fund and hence is a much better proxy for the actual returns of the investors in the fund.

The results from the Morningstar study were shocking. In all the 17 categories of equity mutual funds that Morningstar follows, the dollar-weighted returns were less than the time-weighted returns over a 10-year period, sometimes by as much as 13.4% per annum!

The reason for such poor performance for retail investors as compared to the funds was, in Swensen’s words, because ‘they bought after the funds had gone up, and they sold after the funds had gone down’.

Simply put, the verdict from the Morningstar study was that retail investors are horrible at timing the market, often choosing the worst possible moments to buy and sell shares – they were buying high and selling low.

Timing the market – picking the market bottom to buy shares and picking the market top to sell shares – has proven to be notoriously difficult, even for the ‘experts’. That is why we at the Motley Fool espouse long-term investing and leave timing the market to others.

Consider an investment made in these four companies from 3 Jan 2005 till 12 April 2013 companies:

  1. Vehicle and commercial testing company, VICOM (SGX: V01).
  2. Infrastructure engineering and geospatial imaging technology company, Boustead (SGX: F9D).
  3. Instant beverage and ingredients manufacturer, SuperGroup (SGX: S10).
  4. Mainboard and Catalist Stock Exchange operator, Singapore Exchange Limited (SGX: S68).

Investors in the afore-mentioned companies could have reaped cumulative returns (dividends included) of 527%, 1000%, 960% and 406% respectively. These were the outsized returns that could be achieved by buying before the global financial crisis of 2007/2009 and the recent European debt debacle and holding through those difficult times.

Investing in stocks is about thinking of buying a piece of a business and holding on if its underlying business performance continues to improve and hence increase the intrinsic value of those shares. By doing so, we can improve our odds of success greatly. Want to learn more investings tips and tricks? Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David KuoTake Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.