By: Paul Nixon, Head of Technical Marketing and Behavioural Finance at Momentum Investments
Morningstar recently released their annual Mind the Gap study, which leverages investor returns data to measure the costs of bad timing. Unsurprisingly, the findings of the 2019 study, which looked at the 10-year returns for the years ended 2014, 2015, 2016, 2017, and 2018, are very much in support of an outcome-based investment philosophy – shifting focus away from chasing arbitrary market benchmarks and towards goal-based investing.
This is according to Paul Nixon, Head of Technical Marketing and Behavioural Finance at Momentum Investments, who believes that investors would have suffered far less at the hands of bad timing if they had taken an outcome-based approach. “The 2019 Mind the Gap study reveals that the average investor lost 45 basis points to timing over five 10-year periods ended December 2018. While this may not seem that extreme, it is important to remember that this is an average, so there are some investors who likely lost as much as 10-times this as a result of one poor investment switch.”
The gap between potential and actual returns is essentially a form of self-sabotage to investors’ future financial success, and Nixon believes that staying invested remains the surest way to avoid these timing-related costs. “The study reveals that this is especially true during uncertain economic times, with the ‘gap’ widening around dramatic market reversals. This is because investors tend to panic, which results in selling when the market drops and missing out on the subsequent recovery.
“To minimise the costs of bad timing, an outcome-based investment approach is therefore suggested. The objective of an outcome-based solution is simple: to keep clients invested. This approach is about building predictability into returns by retaining focus on the end goal and not trying to outperform the market over the short term,” Nixon concludes.