Performance Perspectives Blog

Buy high and sell low isn’t a recipe for success, but it’s the strategy most investors seem to follow

by | Nov 2, 2013

In this weekend’s WSJ, Jason Zweig discusses how investors too often make poor contribution/withdrawal decisions (see “How Investors Leave Billions on the Table“).

He mentions how Pimco’s Total Return fund had a 12-month return (as-of September 30) of -0.74%, that outperformed its index (Barclays U.S. Agg) by more than 100 bps. And yet, the average investor had a return of -1.4%, still better than the index (that had a -1.89% return), but far below the fund itself. And why? Because they decided to withdraw $7.3 billion in May and June, just before the fund rebounded.

“Buy low, sell high” is the mantra one should practice, but too often, because of emotions, we observe “buy high, sell low.”

Jason’s citing of the average investor experience is acknowledging the value of a money-weighted alternative, that takes cash flows into consideration. All funds should provide their investors with their respective personal rate of return. If it outperforms the fund itself, bravo – good timing of cash flows! But if it didn’t, well, they goofed. It also wouldn’t hurt to provide a comparable index, that takes these flows into consideration. Meaning, the investor will see (1) how the fund did, relative to the time-weighted index and (2) how they, the investor, did, using a money-weighted return, alongside the index presented in a money-weighted fashion.

Free Subscription!

The Journal of Performance Measurement

The Performance Measurement Resource.

Click to Subscribe