I recently attended an investment seminar for fellow investment professionals. One of the speakers asked the group what the return of the best performing equity mutual fund was during 2000 – 2009. Many guesses were made but the correct answer was 18.2% per annum. The follow up question from the speaker was “what was the average return of investors in this same fund”? Again, many guesses were made but the astonishing correct answer was -11%! Why could a fund with such a great return give investors, on average, such a poor experience?
As long-term investors, we know the answer to this. Investor behavior drove investment into the fund as it was posting great returns. As markets fell, the fund returns didn’t match up to the previous short-term performance and investors liquidated and got out. The average investor did exactly what the average investor always has been shown to do…buy high and sell low. Had they simply remained invested through this 10-year period, they would have had a great experience and been much wealthier today.
A similar phenomenon is happening right now. We are all aware that gold, as an asset class, has had a great 5-year run topping out recently at $1,900 per ounce. At one point in August 2011, the largest Exchange Traded Fund of gold (ETF GLD) was larger in asset size than the largest ETF of the S&P 500 (ETF SPY)*.
Are investors really so sure that owning gold is a better investment than owning a share of the largest 500 companies in America? It seems to us that the gold bubble will eventually pop, as bubbles seem to do, and we expect the average investor will have a similar experience as the mutual fund investors had in the previous paragraph.
“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all—not some—all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?” —Warren Buffett
The Experience of the Wealth Strategies Group
The Wealth Strategies Group is made up of professionals who spend a great deal of time understanding and working on investor behavior. We know volatility creates a sense of uneasiness but we believe in the tried and true long-term approach to investment management. We work closely with our clients to learn their risk tolerance levels so that we can allocate their assets appropriately to minimize risk for the level of return the client is seeking.
This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.