You will be able to explain why investors often earn less than the funds they hold.
Hui Min's fund factsheet says the fund returned a healthy amount over the past three years. Her own account says she lost money in it. Both statements are true. The factsheet measures what happened to one dollar left in the fund for the whole period. Her account measures what happened to her dollars, which went in and came out at particular times. The difference between those two numbers is often called the behaviour gap, and it's one of the plainest ways to see what money behaviour costs.
A fund's published return is a time-weighted return: the growth of a single sum held from the start of the period to the end, with no money added or taken out. It tells you how the fund did.
Your own result depends on when your money arrived and when it left. If you put most of your money in just before a fall, your result will be worse than the fund's even though you owned the same thing. Economists call this a money-weighted or dollar-weighted return. It tells you how you did.
Here is a worked example with made-up numbers. A fund rises 20% in year one, falls 20% in year two and rises 20% in year three. Anyone who held from start to finish made 15.2% over the three years.
Hui Min put S$5,000 in at the start. After the good first year it was worth S$6,000, and the strong number made her confident, so she added S$10,000. In year two the fund fell 20% and her S$16,000 became S$12,800. She sold everything, unable to watch any more, and sat in cash through year three while the fund rose 20%. She put in S$15,000 and took out S$12,800, a loss of S$2,200, in a fund that gained 15.2%.
The fund did nothing different for Hui Min than for anyone else. The whole gap came from the timing of her money: the larger sum went in after a rise, and all of it came out after a fall.
That pattern, buying after rises and selling after falls, is the one that tends to leave investors earning less than their funds. Recent gains make a fund feel safer and more attractive, so money flows in near the high points. Losses make it feel dangerous, so money flows out near the low points. Module 6 looks at the patterns behind this, including recency and herding.
One honest point about the arithmetic. Not every gap is a mistake. If Hui Min had added the S$10,000 and simply held, she would have ended with S$15,360, a gain of only S$360 on S$15,000, still far below the fund's 15.2%. That smaller shortfall came only from when her money happened to arrive, and someone who invests a regular amount every month will also see a result that differs from the fund's for this reason. The costly part was the selling after the fall, which turned a shortfall into a S$2,200 loss.
Morningstar, the fund research firm, publishes a regular study comparing the returns investors actually earned in funds with the returns of the funds themselves, using the money flowing in and out of each fund. Its studies have generally found that investors earned less than the funds they held. The size of the gap varies from year to year, by type of fund and by method, and other researchers have questioned some of the methods, so treat any single figure you see quoted with care. The direction of the finding is the useful part: the fund is rarely the main reason an investor does badly.
The gap also tends to be wider in funds that swing more, such as single-sector or thematic funds, because big swings tempt more buying and selling.
If the gap comes from timing decisions, the way to narrow it is to make fewer of them, and to make the ones you keep ahead of time. A monthly investment that goes in on the same date whatever the news removes the choice of when to buy. A written rule about what you do in a fall removes the choice of whether to sell. Investing 101, lesson 7.3, What a market fall looks like in your own account, shows what a fall does to a balance in dollars, and Build and run an ETF portfolio, lesson 8.2, Rules for when markets fall and when they boom, shows how to write those rules.
None of this guarantees a good result. Markets can fall for years. It only means that whatever the fund earns, you're more likely to collect most of it.
Your own records are where this becomes real. Most brokers and platforms show your transaction history with dates and prices. Pick one fund or ETF you hold or used to hold, pull up those dates, and look at what the price had been doing in the weeks before each one.
Look at one fund or ETF you hold and write the dates you bought or sold, and whether each followed a rise or a fall.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).