Do UK retail investors buy at the top and sell at the bottom?
Andrew Clare & Nick Motson wrote a working paper in 2010 called ‘Do UK retail investors buy at the top and sell at the bottom?’. The authors are both members of Cass Business School’s Centre for Asset Management Research (CAMR), Cass Business School, London.
They summarised their results as follows:
‘In this paper we have examined the impact of investment timing decisions on realised equity investment returns for both UK retail and institutional investors, and for bond market mutual funds. We find that equity-related retail investment flows (as defined by the Investment Managers Association) tend to follow good performance and to anticipate poorer performance. This investment pattern has effectively cost the median UK retail equity investor a cumulated total return of 20% over the last 18 years. It should also be remembered that this annual performance gap of 1.17% for retail equity investors is a median value, in other words some investors would have experienced a much worse investment performance over this period. We also find that equity mutual fund institutional flows (again, as defined by the IMA) tend not to suffer from the same detrimental investment timing issues. This is probably because the flow of institutional money, into regular savings products for example, tends to be more stable over time and is influenced less by investment judgment. Our results, with regard to retail investment patterns, and its influence on the investment return experience are consistent with evidence obtained in the past using comparable data on US mutual funds. Finally, we find tentative evidence that suggests that timing decisions with regard to bond mutual funds have enhanced the returns of the median investor since the performance gap is positive, at just over one percentage point per annum.’
Which basically means, yes, retail investors who are left to their own devices destroy returns available to them with poor timing – they haven’t got a robust, evidence based, repeatable and rigorous investment process. Just like institutional investors use!
By taking advice from an adviser with this process in place, it has been shown that investors diversify their investments more and buy and sell more in line with their attitude to risk and lifestyle choices than with performance issues.
Buxton Beresford uses reputable third parties to ensure that the investment portfolios we recommend to clients perform to a client’s expectations by diversifying around their attitude to risk. We tend to invest clients’ money in passive structures or actively managed funds with a long term track record of out-performance.