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Canadian investors are underperforming the mutual funds they own, a sign of weak decision-making about when to buy and sell.

Morningstar, the Chicago-based investment research firm, studied the returns investors in seven major markets received from mutual funds. Across all fund categories, the average Canadian mutual fund gained 8.4 per cent over the five-year period under scrutiny, while the average fund investor made 7.3 per cent. That's a gap of 1.1 percentage points, third largest in the markets studied.

Studies like this have long been used by the advice business to show individual investors are prone to bad decision-making. But mutual funds in Canada are overwhelmingly sold by advisers. DIY investors working entirely on their own hold just a small fraction of the $1.4-trillion invested in funds in Canada.

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Investment advisers often say their clients need a firm hand to keep them from acting emotionally. But the Morningstar study suggests that (a) advisers themselves are letting emotions rule their investing or (b) advisers are being swayed by their emotional clients. Another possible explanation is that advisers contributing to the underperformance trend are acting more as sales people than providers of financial advice.

Investment sellers are more likely to suggest frequent changes in strategy or product. They're trying to sell idea of expertise based on picking hot investments, buying and selling opportunistically and generally outthinking the market. All of this manoeuvring may be the reason why investors are underperforming their funds. Basically, their advisers are erasing value with unproductive strategizing.

Some signs you have an adviser who is chasing returns:

- You're often being urged to invest some of your money in hot funds.

- The funds you're urged to sell are hot picks that never panned out.

- You own multiple funds of the same type

- You own a dozen or more funds

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- Your adviser focuses a lot on one-year returns

Too much buying and selling is a proven wealth destroyer for everyone -- individual investors, advisers and portfolio managers running mutual funds. The advisers who add value pick their funds with confidence and let them do their work.

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