Fund Spy

Mind the Gap: Why Investors Lag Funds

Russel Kinnel

What happens when investors meet mutual funds? Sometimes it's a great thing, as investors find good funds and enjoy solid returns for a long time. At other times, even funds with great returns get used poorly because people don't get in until after they've put up huge returns and then the funds fall flat, as often happens with any asset that has spiked in value.

Big surges and big declines spur greed and envy, then fear and anger. The more emotional an investor, the worse his decisions will be. The past two bear markets are perfect examples. Some people bought stock funds heavily prior to the bear markets only to see their investments plunge. Then they bailed close to the bottom only to miss big rebounds. Not everyone did that, of course--many were patient--but flow data tell us too many went in the wrong direction.

Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.