Why You Will Lose Even With the Best Investment Managers

I was really interested in a recent article by Teh Hooi Ling, head of research in value investing outfit Aggregate Asset Management. The article, titled How to win at a winning game, opened with a strong line: “It is a fact. A lot of novice investors in equities ended up losing money.”

While it would be great news – as that would mean that novice investors are actually making money – if I could somehow dispel that statement, the sad truth is, I have to agree with her. Thing is, even if you have managed to snag the best investment managers to help you manage your funds, you might still end up losing big.

In Teh’s article, she highlighted how more than half of Peter Lynch’s investors had lost money in his fund. It’s an astounding anecdote when you consider Lynch’s 13-year track record with the Fidelity Magellan mutual fund (the equivalent of unit trusts here) in the USA; from 1977 to 1990 – the year he retired – he had led the fund to compounded annualised returns of 29% a year. And yet, that Herculean effort seemingly couldn’t save half his investors from losing money.

While Lynch’s tale might be apocryphal, it does corroborate very well with the results of other research efforts on the difference between an investor’s returns and those of his or her investment vehicle.

For instance, David Swensen, who’s the chief investment officer of Yale University’s multi-billion dollar endowment, once gave a lecture and recounted how fund-investors’ returns over a 10 year-period had lagged (often badly and by as much as 13%!)  those of their funds itself.

And in yet another study, investment research outfit DALBAR analysed the returns of American mutual fund investors and compared them with the S&P 500’s (a widely-followed American stock market index) price changes over rolling 20-year periods from 2003 to 2012. The results were again unequivocal – investors in the mutual funds had underperformed the index by huge margins.

It seems that investors are always losing out, no matter how great the underlying investment vehicle is. A huge part of that problem stems from many investors’ propensity to buy and sell at exactly the wrong times; and that’s not just my opinion though, it’s what Swensen and DALBAR have concluded as well.

The SPDR Straits Times Index ETF (SGX: ES3) is an exchange-traded fund that tracks the Straits Times Index (SGX: ^STI), the most widely-followed market barometer in Singapore. Since its inception in April 2002, the fund has generated compounded annualised returns (inclusive of reinvested dividends) of 8.36% as of 31 March 2014. I’ve not come across any studies on the possible differences between the fund and its investor’s returns, but I do hope that any difference, if there exists, would be minute. However, it’s not something I would be banking on.

While it’s an almost alien concept to hear of an investor’s funds being locked up in a unit trust or mutual fund, it’s not uncommon to hear of lock-up periods measured in years for new investors that have just bought into hedge funds (funds that are under lesser restrictions and that are only available to individuals with high net worth). Borrowing that concept from the hedge funds, having a lock-up period of some sorts during a period of market turmoil (as uncomfortable as it may seem) could possibly be one of the best things to happen to an investor as it takes away the investor’s ability to cash out on his or her investments at exactly the times when shares are a bargain and when one should be buying.

As it stands, even the best investment managers can’t do anything for you if you lack the discipline to stay the course when markets inevitably go south… and then recover. Even if your choice of investments would never implement a lock-up period, there’s nothing to stop you from creating one for yourself.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.