What caught my eye this week.
Rejoice that at some point you began reading – or even subscribed [1] – to Monevator.
Because while our core message to invest passively [2], automate [3] your savings, and then find a different hobby [4] is a terrible business model for an investing blog, the evidence [5] 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 [6] [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 [7] 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:
[8][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 [9] 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 [10]). But it got my co-blogger to early retirement [11]. For most readers it’s your best shot at achieving the same.
Have a great weekend!
From Monevator
On the plateau – Monevator [12]
Compare funds: what to look for – Monevator [13]
From the archive-ator: A mortgage is money rented from a bank – Monevator [14]
News
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 [15]
Rise in National Insurance to fund boost for care and NHS – Sky [16] / Guardian [17] / [Search result] FT [18]
Long delays to getting state pension being reported by many turning 66 – ThisIsMoney [19]
Empty shelves and HGV driver shortages: Brexit eight months on… [Video] – TLDR [20]
…with missing HGV drivers also being blamed for flu jab delays – BBC [21]
Downing Street again hints triple lock could be watered down – Guardian [22]
UK enjoys property sales boom as prices continue to accelerate – BBC [23]
Oxygen shortages due to Covid are disrupting the space industry – BNN [24]
[25]
People need a £17,465 savings pot to feel secure, says Yorkshire Building Society/CEBR report – ThisIsMoney [26]
Products and services
28 steps to get your money into shape – Guardian [27]
How to get the best deal on a 90% or 95% mortgage – Which [28]
Trick to getting a market-leading 1.9% on one-year savings – ThisIsMoney [29]
Get up to £500 cashback when you transfer your pension to ii [Offer ends 30 September 2021] – Interactive Investor [30]
UK energy bills to rise after record surge in wholesale electricity prices – Guardian [31]
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade [32]
Is Chip’s new savings account any good? – Be Clever With Your Cash [33]
Homes for sale with film connections, in pictures – Guardian [34]
Comment and opinion
Where greatness lies – Compound Advisors [35]
Why do we work too much? – The New Yorker [36]
Cost versus sentimentality – Incognito Money Scribe [37]
(Near) optimal retirement planning using machine learning [Podcast] – Rational Reminder [38]
Cash is still king, at least emotionally – Klement on Investing [39]
Whimsical – Indeedably [40]
Dating finances and the lessons of lockdown [Search result] – FT [41]
Blockchain for the rest of us mini-special
Bitcoin for Bogleheads – Accidentally Retired [42]
An investor’s deep dive on Ether and Ethereum – Banker on FIRE [43]
From the archive-ator – Should you own Bitcoin in your portfolio? – Monevator [44]
Bitcoin futures roll costs are an impediment to any ETF [Nerdy] – ETF.com [45]
Naughty corner: Active antics
Beijing’s tech sector shock casts a long shadow [Search result] – FT [46]
Valuing China’s tech giants after the government crackdown – Musings on Markets [47]
What shorting ETFs means for long-term investors – Morningstar [48]
Value stocks don’t seem to be cheap for any intrinsic reason [Video] – AQR [49]
… but beware some academics now think the Value Premium was juiced – AlphaArchitect [50]
Covid corner
Oxford-Astra vaccine technology used to design cancer-fighting jab – Sky [51]
Long-haulers are fighting for their future – The Atlantic [52]
What’s behind the clamour in the US for false Covid cure ivermectin? – NBC [53]
Kindle book bargains
Stuffocation: Living More with Less by James Wallman – £0.99 on Kindle [54]
The Basics of Bitcoin and Blockchains by Antony Lewis – £2.19 on Kindle [55]
Captivate: The Science of Succeeding with People by Vanessa van Edwards – £0.99 on Kindle [56]
The Smartest Guys in the Room: The Fall of Enron by Peter Elkind and Bethany McLean – £0.99 on Kindle [57]
Get a Kindle: buy one [58] to save money and space!
Environmental factors
American homebuyers are running towards climate change – Redfin [59]
A cancer-quashing microbe emerges from the deep – Nautilus [60]
What I learned renting my parents’ off-grid home on AirBnB – The Atlantic [61]
Rural America is gearing up for a generation of change – RCM [62]
Off our beat
Zoom dysmorphia is following people into the real world – Wired [63]
Honesty researcher Dan Ariely retracting a study over fake data – Buzz Feed [64]
China curbs amount of time kids can spend playing video games – Guardian [65]
Afghan biometric databases abandoned to the Taliban – MIT Tech Review [66]
Facebook is the AOL of 2021 – ZD Net [67]
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 [68]
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