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Why It Doesn't Pay to 'Follow the Leader'

A report from Morningstar shows why having your own plan, and sticking to it, matters.
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You know better than anyone that you only win by leading, not following.

Now there's more proof that you should never just jump on the bandwagon, from investment research company Morningstar. On Thursday, Morningstar published a snapshot of investor returns for 2013, in an article by Russel Kinnel, Morningstar's director of mutual fund research.

It turns out if you played follow-the-leader last year, putting money into sectors that were popular with other investors, it was a losing investment strategy. By contrast, if you took a risk and put money in less popular areas, you were likely to make out much better.

Morningstar measures investor success by examining the gap between the average investor's returns and those of the average fund. The bigger the gap, the worse investors did. It turns out the 10-year gap between the average investor return and the average fund return jumped to 2.49 percent at the end of 2013, compared to 0.95 percent at the end of 2012.

Put another way, the typical investor gained an annualized 4.8 percent by year-end 2013, compared to 7.3 percent for the typical fund.

A Morningstar snapshot of fund flows for 2013 shows why following others is often a mistake.

Another way to examine the gap is to look at investor outflows from funds, and compare them to fund performance. U.S. equity funds saw outflows of $94 billion in 2012, but notched a 35 percent gain in the 2013. By contrast, taxable bond funds saw inflows of $270 billion, but notched a measly 0.15 percent gain.

"We saw massive inflows to intermediate-bond funds in 2012 just before one of their worst years in the past 40 years," Kinnel says.

The problem, Kinnel says, is that too many investors listened to messages that said the U.S. economy was doing poorly, while other parts of the globe--namely China--were doing well. And that simply wasn't true.

So the best idea is to have a plan and carry on.

"Who cares if a talking head predicts gold will surge and stocks will tank," Kinnel says. "Focus on your needs and goals."

 

 

 

IMAGE: Gallery Stock
Last updated: Feb 28, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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