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Weekend reading: The return of the return gap

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What caught my eye this week.

Rejoice that at some point you began reading – or even subscribed – to Monevator.

Because while our core message to invest passively, automate your savings, and then find a different hobby is a terrible business model for an investing blog, the evidence is clear its the best advice for the average person.

Just the latest salvo to scatter the hand of fund-shuffling hobbyists comes with a new ‘return gap’ survey from data giant Morningstar [Search result].

Its annual Mind The Gap survey reports investors earned about 7.7% per year on the average dollar they invested in the decade to the end of 2020.

That is about 1.7% less per year than the funds themselves delivered in total returns over the same period.

This so-called return gap reflects the wealth destruction average investors do to their portfolios by badly trading funds.

The return gap, yah

Morningstar surveyed the US, but there’s no reason to think things aren’t the same everywhere. Probably worse, in fact, given the greater inroads made by passive investing across the pond.

It’s worth stating that return gap studies do have their critics. (The similar DALBAR study in particular has been under the cosh for years). But regardless of the specific findings, the overall takeaway is sound.

In the image below, the vertical lines for each row in the graphic help to illustrate the gap between potential and realized returns for each category:

[Click to enlarge the gaps!]

How to mind the return gap

It’s especially notable that the the lowest return gap came with the Allocation fund category.

These are funds-of-funds like Vanguard’s Lifestrategy offering. They contain a mix of assets, and they do your shuffling for you as per preset rules.

Allocation funds work because you just lob money in each and every month, regardless of your hopes and fears.

And because you don’t see the sausage being made.

The average investor thinks bonds are too expensive or US equities are about to crash and takes action accordingly. Which would be fine if their timing was good – but it’s demonstrably not. Hence the return gap.

It gets even worse when you drill down into alternative and sector-specific funds – prime candidates for performance-chasing by both fund houses and the investors who belatedly get on the bandwagons the professionals set rolling.

Morningstar’s advice? Use index funds, lean on allocation funds to do your heavy lifting, avoid volatile sector-specific funds, and dollar-cost average to avoid taking a thousand nicks from poor timing decisions.

It’s not very exciting. It’s not for investing fanatics (like me). But it got my co-blogger to early retirement. For most readers it’s your best shot at achieving the same.

Have a great weekend!

From Monevator

On the plateau – Monevator

Compare funds: what to look for – Monevator

From the archive-ator: A mortgage is money rented from a bank – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Rise in National Insurance to fund boost for care and NHS – Sky / Guardian / [Search result] FT

Long delays to getting state pension being reported by many turning 66 – ThisIsMoney

Empty shelves and HGV driver shortages: Brexit eight months on… [Video]TLDR

…with missing HGV drivers also being blamed for flu jab delays – BBC

Downing Street again hints triple lock could be watered down – Guardian

UK enjoys property sales boom as prices continue to accelerate – BBC

Oxygen shortages due to Covid are disrupting the space industry – BNN

People need a £17,465 savings pot to feel secure, says Yorkshire Building Society/CEBR report – ThisIsMoney

Products and services

28 steps to get your money into shape – Guardian

How to get the best deal on a 90% or 95% mortgage – Which

Trick to getting a market-leading 1.9% on one-year savings – ThisIsMoney

Get up to £500 cashback when you transfer your pension to ii [Offer ends 30 September 2021]Interactive Investor

UK energy bills to rise after record surge in wholesale electricity prices – Guardian

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Is Chip’s new savings account any good? – Be Clever With Your Cash

Homes for sale with film connections, in pictures – Guardian

Comment and opinion

Where greatness lies – Compound Advisors

Why do we work too much? – The New Yorker

Cost versus sentimentality – Incognito Money Scribe

(Near) optimal retirement planning using machine learning [Podcast]Rational Reminder

Cash is still king, at least emotionally – Klement on Investing

Whimsical – Indeedably

Dating finances and the lessons of lockdown [Search result]FT

Blockchain for the rest of us mini-special

Bitcoin for Bogleheads – Accidentally Retired

An investor’s deep dive on Ether and Ethereum – Banker on FIRE

From the archive-ator – Should you own Bitcoin in your portfolio? – Monevator

Bitcoin futures roll costs are an impediment to any ETF [Nerdy]ETF.com

Naughty corner: Active antics

Beijing’s tech sector shock casts a long shadow [Search result]FT

Valuing China’s tech giants after the government crackdown – Musings on Markets

What shorting ETFs means for long-term investors – Morningstar

Value stocks don’t seem to be cheap for any intrinsic reason [Video]AQR

… but beware some academics now think the Value Premium was juiced – AlphaArchitect

Covid corner

Oxford-Astra vaccine technology used to design cancer-fighting jab – Sky

Long-haulers are fighting for their future – The Atlantic

What’s behind the clamour in the US for false Covid cure ivermectin? – NBC

Kindle book bargains

Stuffocation: Living More with Less by James Wallman – £0.99 on Kindle

The Basics of Bitcoin and Blockchains by Antony Lewis – £2.19 on Kindle

Captivate: The Science of Succeeding with People by Vanessa van Edwards – £0.99 on Kindle

The Smartest Guys in the Room: The Fall of Enron by Peter Elkind and Bethany McLean – £0.99 on Kindle

Get a Kindle: buy one to save money and space!

Environmental factors

American homebuyers are running towards climate change – Redfin

A cancer-quashing microbe emerges from the deep – Nautilus

What I learned renting my parents’ off-grid home on AirBnB – The Atlantic

Rural America is gearing up for a generation of change – RCM

Off our beat

Zoom dysmorphia is following people into the real world – Wired

Honesty researcher Dan Ariely retracting a study over fake data – Buzz Feed

China curbs amount of time kids can spend playing video games – Guardian

Afghan biometric databases abandoned to the Taliban – MIT Tech Review

Facebook is the AOL of 2021 – ZD Net

And finally…

“Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time.”
– Warren Buffett, The Snowball

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
{ 10 comments… add one }
  • 1 Fremantle September 4, 2021, 11:22 am

    Interesting results on the return gap survey. Any timing errors would largely balance out for auto investment by direct debit or company pension contributions where you don’t have any control over timing (although I’ve always wondered whether there are any algorithms looking for price boats just as auto pension contributions hot the market, a bit like playing the index edge game for companies moving in and out of the major indices

    Must be over trading.

  • 2 Cosmop September 4, 2021, 1:59 pm

    “UK enjoys property sales boom”…whose enjoyment would that be then? Certainly not first time buyers!

  • 3 An Admirer September 4, 2021, 2:06 pm

    Nice to see NI and tax “reform” doing so well. Reform here meaning, pay more.

    Aren’t tax rises basically a form of inflation for the income-receiving?

  • 4 Hariseldon September 4, 2021, 2:51 pm

    The article about the dishonest data behind the honesty research data was good, in particular the linked to analysis of the data was fascinating in how they revealed the fraud.

    Disconcerting is the comment that scientific data fraud is not a rare occurrence.

  • 5 Cantab September 4, 2021, 4:50 pm

    Interested by the YBS savings report figures shown in the inset graph. Much higher rates than previously reported figures of average total savings would suggest. Seems to me that means there are a bunch of medium term savings, such as for a holiday, new kitchen etc. which are intended to be spent before too long, being rolled in with long term/rainy day savings. Certainly I know from my own budget that doing that flatters my, already fairly decent, savings rate.
    Sadly I couldn’t see any detailed methodology in the report to substantiate or disprove this.

  • 6 Mousecatcher007 September 4, 2021, 9:32 pm

    That RCM link tried to instal a virus on my phone.

  • 7 Tom-Baker Dr Who September 5, 2021, 8:29 am

    Charlie Bilello’s ‘Where greatness lies’ is a great read! As I celebrate my ISA’s more than 20% current annual return, the last paragraph sums up very well what we should all never forget:

    ‘Enjoy the calm markets for as long as they last, but remember this: when the seas get rough, when the skies turn dark, when the markets are in turmoil – that’s where greatness lies’.

  • 8 xxd09 September 5, 2021, 10:36 am

    Cut costs as much as you can-use global index funds only and don’t trade, save as much as you can and live frugally
    These three factors are under the individual investors control and probably will contribute most to the success of his/hers portfolio
    However the very human desire to meddle is a constant-a play portfolio of might be a help to control this urge -self discipline is tough

  • 9 Dan September 5, 2021, 10:18 pm

    “while our core message to invest passively, automate your savings, and then find a different hobby is a terrible business model for an investing blog”

    I have to admit, since finding Monevator a few years ago and doing precisely that, my visits are definitely less frequent. Its not that I am less interested, it’s just that there aren’t any tweaks necessary really once everything is set in place.

    I still visit and read through all your posts, but not with the fervour I once did when I was first getting to grips with the passive, hands off approach.

    I do enjoy the off beat stories though, as they are generally things that I don’t stumble across naturally.

    Keep up the good work!

  • 10 Mousecatcher007 September 6, 2021, 1:31 am

    “while our core message to invest passively, automate your savings, and then find a different hobby is a terrible business model for an investing blog”

    I dare say this must be true. But I for one am still here six years or so since discovering this excellent blog, so you must be doing something right! Personally, whilst the logic of passive investing was rapidly clear on an intellectual level, it took me quite some time to really accept it deep down. I’m certainly not willing to instal my own gas boiler, so why would I have the chutzpah to go DIY with global investments? For there was always a voice saying, ‘It can’t be that simple, surely. They’re professionals – they must know more than the herd!’ But of course in aggregate they *are* the herd.

    These days I do still have some active investments (gasp! The horror!). But now I hold them knowing the odds are against me. And I’m happy with that: I trust my passive core to do the heavy lifting. Any active over-par extras are jam on top, and any active below-par performance I can live with.

    And there’s always something to ponder in these Saturday Monevator links to keep me (mainly) on the passive straight and narrow.

    Keep up the good work!

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