How To Time Buying & Selling Just Right

How To Time Buying & Selling Just Right

Research shows that investors tend to have lousy timing when buying or selling mutual funds, performing worse under the pressure of high volatility and doing better with more middle-of-the-road funds, reports an article in Barron’s. Investors in lower-risk, balanced funds are less likely to panic if the fund dips a bit, whereas investors in high-risk, volatile funds have a greater tendency to chase performance, which can often lead to significant losses.

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Investors can look at what Morningstar calls their “investor return stats” to determine how good their timing is, the article details. Those stats calculate the cash inflows and outflows of investments so that investors can see what they’re actually earning on their trades. According to Morningstar data cited by Barron’s, equity funds in the most volatile sectors like technology and energy had the biggest gap between what the funds generated and what investors actually made—13.84% compared to 9.59%, annualized over 10 years through 2021. That discrepancy is largely due to bad timing on the investors’ part. Meanwhile, funds with more diversification across less volatile sectors had only a 1.19% gap between fund returns and investor earnings—15.85% compared to 14.67%. And in allocation/balanced funds, that gap shrunk even more, to 0.77%—9.43% for fund returns and 8.65% for investors.

Prime examples of the hit investors can take from poor timing in risky growth funds are the American Beacon ARK Transformational Innovation and Morgan Stanley Institutional Discovery Portfolio funds, both of which had climbed over 140% in 2020 when tech stocks were flying high. Investors poured in, but too late, and the funds plummeted over the next two years. The five-year investor return for Morgan Stanley is currently at -11.5% while the American Beacon fund’s is -19.7%, according to the article. As for bond funds, their investor return gap is even wider than allocation funds, according to Morningstar’s data, with taxable bond funs at 1.17% and municipal bonds at 1.21%. That could be due to the panic that ensues when the principal of a bond fund drops even a little bit, in contrast to stocks which are expected to go up and down. “Bond fund investors generally just want to collect their bond yield and don’t want anything to go wrong with the principal of their fund investments,” Russ Kinnel of Morningstar told Barron’s. “But that isn’t how it works.”

Somewhat of a “happy medium” between stocks and bonds, allocation funds offer a less risky place for investors to settle in without having to worry too much. That’s especially true of “target-date funds” which provide scheduled contributions to 401(k) plans, determining allocations based on the investor’s expected retirement age. Since the purchases are automatic, it prevents investors from buying only when a stock peaks. But even investors without 401(k)s can imitate the strategy by purchasing a plain vanilla, low-cost fund such as the Vanguard Balanced Index, the article advises. It may be boring, but it will provide the kind of steady returns investors can rely on during tumultuous times.

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