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Fund Spy

Mind the Gap 2011

Some fund investors have lousy timing, but you don't have to.

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Fund investors have been buying and selling at the wrong times lately.

The latest figures on investor returns confirm it, but it's no surprise. Large flows from equity funds to bond funds in the past couple of years have meant that investors who did make changes were generally going the wrong way. Sure, huge sums remained in equity funds and participated fully in the rally that began two years ago. However, the money that did move was mostly selling low and buying high. For pretty much all of 2009 and 2010, bond funds had net inflows and stock funds had net outflows.

To see what impact these moves had on investors' wallets, we turn to Morningstar Investor Returns. Investor returns are calculated by adjusting a fund's returns to reflect inflows and outflows. We then asset-weight those individual funds' investor returns to arrive at a figure that tells us how the average investor fared in an asset class. We can then compare those numbers with the average fund and see which fared better. Morningstar director of personal finance Christine Benz put it this way: "A fund's investor return takes into account the fact that not all of a fund's investors bought it at the beginning of a period and held it until the end. To use a simple example of investor returns in action, assume a fund generated a 10% total return in a calendar year, with most of those gains coming in the year's first quarter. If investors added substantial sums of money to the fund after its first-quarter runup, the fund's investor returns for that year would be lower than the fund's 10% total return."

Russel Kinnel has a position in the following securities mentioned above: VHCOX, RYSEX. Find out about Morningstar’s editorial policies.