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Huge hit taken by inert investors

Posted by: Brian Dennehy
Membership level: Free

 

Inert investors are losing out on substantial profits, year after year.  Here we set out the evidence, the long-term impact, and what can be done about it.

Some investors think all funds are much the same. They could not be more wrong.  In this analysis, we consider the performance of just one sector (UK Smaller Companies) over the last 6 months (table 1).  

The difference between the top and bottom funds is stark: 11.47%

That is a big difference between the best and the worst over such a short period.  Lack of vigilance by investors and advisers alike mean that investors are taking a big hit to their wealth.

The price of inertia

11% growth over 6 months is startling - many would be happy with that in a year!

Let's do a quick experiment.  Consider the following two scenarios:

  • In Scenario 1 an investor doesn't pay attention and so ends up in poor to mediocre funds on a regular basis, which only generate 5% per annum.
  • In Scenario 2 a different investor has a process to select outstanding funds and, in so doing, the funds generate 10% per annum.  That's "merely" an additional 5% compared to the investor in scenario 1.

This is quite conservative given that we've already seen that the difference between the best and worst funds in the UK Smaller Companies sector in only 6 months was 11.47%

The impact of selecting outstanding funds can be simply demonstrated:

  • Double your money more quickly.  With 10% p.a. growth it takes just 8 years to double your initial investment.  With 5% growth it would take 15 years.  
  • Over 10 years, if you have £10,000 in an ISA it will grow to £25,937 with 10% pa growth...
  • ...this is a boost of £9,648 compared to the outcome with just 5% growth (£16,289).

We would argue that £9,648 is the price an investor pays for not paying attention: the price of inertia.

How to spot winning funds in advance 

If there was no way to identify winning funds in advance this exercise would be rather pointless. 

But there is at least one powerful, straightforward way for you to do so, and boost your profit potential – Dynamic Fund Ratings.

Here’s how it works. Each month every fund is given a Dynamic Fund Rating, and the higher the rating (5 star is best) the greater the likelihood that the fund will be an above average performer going forward.  

This has been back-tested all the way back to 1994 and the results are impressive (see here for a sector by sector review).  

We have only assumed an additional 5% growth per annum in the example above.  If you had been applying Dynamic Fund Ratings to the UK Smaller Companies sector since July 1994 you could have achieved an extra 7.62% per annum.  That kind of additional return can be life-changing.

If you don't have a rational, disciplined process backing up your investing plan you could be missing out on substantial additional performance.

ACTION FOR INVESTORS

  • Don’t put up with mediocre performance
  • Do have a clear process for reviewing, rating and adjusting your funds

FURTHER READING

  • Read more on Dynamic Fund Selection here
  • Rate your funds to make sure you’re in the best available
  • Starting at the beginning? Click here to follow our investing path

 

Table 1: UK Smaller Companies Sector 

Sector

Average return

Best fund

Worst fund

Difference

UK Smaller Companies

16.69

21.97

10.5

11.47

 

Performance data: 6 months to 21/06/2017, only funds >£50m in size from the Retail UT & OEICs universe

Topic: Generating growth


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