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Fund Spy

How Some Investors Ruin a Great Fund

Volatile funds push all the wrong emotional buttons.

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The stock market's powerful rally since early March has been a blessing for patient investors. Many of the funds that suffered the most during the bear market have experienced the biggest rebounds. But a lot of investors didn't stick around for the comeback. And who could blame them? It's hard to hang tough when your fund has sunk 50% or more. Yet fleeing short-term laggards or jumping to the hot fund du jour often undermines investors' returns.

We at Morningstar have a way of capturing the true costs of fund hopping. In addition to a fund's total return, we calculate what an average investor in the fund really earned. Investor returns adjust the officially reported returns based on cash flows into and out of funds. The gap between the figures essentially tells you how well or how poorly investors did at timing.

When I ran the data at the end of 2008, the gap between reported returns and investor returns had shrunk because customers were fleeing funds in droves as the financial crisis deepened. Initially, that was a good thing because stocks were falling like a rock. But when, at a moment of deep despair, stocks started to rally on March 10, a huge amount of money was sitting on the sidelines.

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.