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Investors are often accused of being poor market timers. They’re thought to panic in downturns only to pile back in when prices surge. It makes for a good story, but evidence for their poor behaviour isn’t always what it’s cracked up to be.

The latest behavioural scorecard is served up by Morningstar in their updated Minding the Gap study. It indicates that investors are prone to poor timing and argues that behavioural changes could correct the problem.

More specifically, Morningstar looked at how the average dollar in U.S.-based funds fared. The idea being to calculate a fund’s dollar-weighted return, which takes into account the flow of money into and out of it over the years. They compare this return with the fund’s more traditional time-weighted return, which assumes an initial investment and no further transactions other than the reinvestment of dividends or interest.

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They found the difference (or gap) between the returns amounted to minus 45 basis points for their universe of funds over an average of five trailing 10-year periods through to the end of 2018 (100 basis points equal one percentage point). That is, the dollar-weighted returns were lower than the time-weighted returns with the difference being attributed to poor timing by investors.

Morningstar goes on to note that balanced fund investors fared better on this measure. Similarly, investors in low-fee funds also fared relatively well.

While I have high regard for Morningstar’s methodology and calculations in this matter, I differ with them when it comes to their interpretation.

In my view, it’s a stretch to equate fund flows (the money moving into and out of funds) as being entirely – or even mostly – attributable to timing choices. That is, deliberate decisions by investors to change their asset allocation by, say, dumping stocks during a market crash.

Sure, that does happen, but it’s also important to remember that there is a buyer for every seller in the market.

Instead, I believe most savers invest their money roughly when they earn it. On the other hand, retirees take money out of their portfolios on a fairly regular basis to pay for living expenses.

The simple choice to save before retirement or to spend in retirement can make a big difference on the return gap calculations even for very disciplined investors.

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I’ll illustrate the situation using four investors who put their money into the Canadian stock market as tracked by the S&P/TSX Composite Index. (The returns include reinvested dividends and do not include fees, taxes or commissions.) Two of the investors are young savers who each start with nothing and put $5,000 a year into the index. Two are retirees who each start with $1-million in the index and then take out $50,000 annually to live on. One saver and one retiree start at the end of 2000 while the other two were born two years later and start at the end of 2002. All four portfolios are tracked through to the end of 2018.

The saver that started in 2000 enjoyed a positive average return difference (their dollar-weighted returns were higher than their time-weighted returns) of 42 basis points annually. The retiree suffered from a negative difference that came in at minus 23 basis points annually. In these cases, the market downturn that followed the dot-com bubble hurt the retiree who had the bulk of their money invested in 2000, while the new saver missed most of the pain.

Now jump ahead two years to the second set of investors. In this case, the saver suffered from a negative return difference from the end of 2002 to the end of 2018 that averaged minus 211 basis points annually. The retiree enjoyed a positive annual difference of 73 basis points over the same period. In this case, the retiree benefited by starting their retirement near a market bottom while the saver didn’t have much money invested at the relatively low prices early on.

I find it hard to say that any of these investors suffered from behavioural problems. They all had reasonable plans based on their stage of life and followed them with discipline through thick and thin. Being born a couple of years early helped the saver and hurt the retiree while starting later was bad for the second saver and good for the second retiree. Two got lucky while the other two did not.

In my view, the return gap is a poor way to measure investor behaviour because luck can play a big role in the results of even very disciplined investors.

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.

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