Fund Spy

The Biggest Fund Cost You Can Control

Karen Dolan, CFA

Buy and hold is dead. That's the topic filling the room at conferences, garnering hits on websites, and making pundits popular. The past decade's desultory equity returns and extreme volatility have convinced many investors that at least some action is better than no action.

Yet investors have never quite stood still with their mutual funds holdings. While we've found that investors generally select better-than-average funds, they tend to buy these funds on the heels of strong performance and sell them when times are tough. We see this pattern on many levels starting with flows into and out of broad asset classes all the way down to individual funds. We're able to dig into the outcomes of this behavioral tendency with the help of Morningstar Investor Returns. Whereas trailing total returns reflect the gains or losses of shareholders who bought on the first day of the measurement period and held tight through the end, investor returns are dollar-weighted. Because they account for money flows into and out of a fund, investor returns provide a clearer picture of what a typical shareholder experienced.

Karen Dolan, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.