A new study confirms what several past investor studies have shown: that despite their best efforts, average mutual fund investors are poor market-timers and fail to beat market averages.
The study — “Past Performance is Indicative of Future Beliefs” — was performed by Philip Maymin, a hedge fund portfolio manager and assistant professor of finance and risk engineering at NYU-Polytechnic Institute, and Gregg Fisher of the investment firm Gerstein Fisher. They examined net investor cash flows for 25,000 mutual funds over the 15-year period ending October 2010. Their findings: The performance of an average investor in an asset class lagged the average performance of the asset class itself by an average of 1.95 percent per year over that period. “We present a model in which a representative behavioral investor believes next year’s returns will exactly match last year’s returns and show that this leads to price adjustments on what would otherwise be random walk securities that effectively lower the future return of high performers and raise the future return of poor performers,” they write.
“The average predicted behavioral lag indeed matches the observed lag when asset returns are lognormally distributed with a mean and standard deviation equivalent to historical fifteen-year averages of six percent and eighteen percent, respectively,” Maymin and Fisher say. “In other words, investors chase returns and in doing so create the conditions of their own demise.”