If you are in the habit of checking your investment portfolio daily, you should find yourself a new hobby. Stop tinkering and your investment portfolio will grow that much faster.
This conclusion was the result of a 10-year study of mutual fund returns by Morningstar, a global investment research company. The study helps explain why investing in funds works better in theory than in practice. There is a difference between the reported returns of a fund and the returns achieved by investors, which is almost always lower. This is called the “return gap.” As reported by the New York Times, researchers found a larger return gap for actively-managed portfolios than for index funds. The average annualized return gap was 2.48 per cent for actively-managed funds and 1.84 per cent for index funds.
A $10,000 investment in an average index fund will grow to $20,076 in ten years, not taking into account the return gap. Factoring in the gap, the typical index investor is left with $16,883.
If that same $10,000 had been invested in actively-managed funds it would have grown to $18,231 without the return gap. With the gap, the returns would be only $14,395.
The larger return gap for the actively-managed portfolio reflects the inevitability that investors will move money out of their investments at inopportune times so that each dollar earns a lower rate of return than if it had been left alone.
Investment advisors attribute the lower return gap on index funds not to the funds themselves, but to the shareholders. Index fund investors are more humble about their ability to time the market, and their goals are modest. They have the tendency to weather the ups and downs of the market and do better in the long run.
