In August, all four of the investment categories we track had positive returns. US small caps did the best, while international stocks followed closely behind. US large caps and bonds also did well. For the year, international stocks are the clear leader, followed by US large-caps. US small caps and bonds have trailed while still making money for their investors.
Same Investment, Different Trades, Different Results
Morningstar Investments has a research study called “Mind The Gap” which documents the difference between the returns that investment funds make compared to the returns that the average investor makes while holding that fund in their account. In theory, if an investor buys and holds a fund for a long period of time without trading it, these two returns would be equal. But in practice, investors make buy/sell decisions that tend to reduce the returns they receive compared to the funds they hold. This is The Gap. Investment funds can be very volatile (both going up, and going down), which causes us to experience intense emotions (like greed and fear), which can lead to poor trading decisions. In other words: investors are often tempted to do the wrong thing at the wrong time.
For example, here are two charts of the VanEck Gold Miners (GDX) exchange-traded fund. The first shows the price of GDX since its inception in 2006:
The second shows the total returns an investor would have received by investing at GDX at the inception date and holding over time:
Here are some observations about these charts:
- Different Timeframes, Different Returns – an investor who bought GDX on its first day of trading in 2006 would be up 98.41% (roughly 3.62% per year on average – not great). Those who bought at the peak in 2011 would have made almost zero returns over the last 14 years! On the other hand, investors who bought in early 2016 – its lowest point – would have made around 19.5% annualized through today. Those who bought at the end of 2024 are up over 86% in 8 months. Markets are volatile, and they move quickly. The same fund can produce radically different results based on the timing of purchases.
- Being Different Is Hard – Humans are social creatures and this part of our nature drives us to behave like those around us in order to fit in. Investment prices are governed by the laws of supply and demand. If there is high demand/lots of people buying, the price goes up, and vice versa. While the average investor may know that lower prices can present opportunities for future returns, that also means most people are selling. It’s not easy to buy investments that no one else wants, but often times, it can lead to attractive returns in the long run. Similarly, it can be hard to avoid buying (or selling) investments that are currently popular, as they are increasing rapidly in price.
- We Don’t Know The Future – When looking at the charts, it’s easy to see when it would have been best to buy. But when looking to the future, all we have is probability. Tomorrow’s price is not known until tomorrow.
- Diversification Makes A Difference – One way to reduce the stress of riding the market rollercoaster is to hold lots of different funds, carefully considering how much of each one to hold. As you can imagine, if all of your investments are in one fund, and it declines by 50%, that will probably impact your emotional health. This emotional reaction dramatically increases the likelihood of selling at the wrong time. A diversified portfolio gives you a better chance of holding or adding to the recently-disappointing funds, while selling some of the best performers. This can improve your portfolio returns in the long run.
- Have An Approach – Are you comfortable buying more of an investment that is currently decreased in value, or does that make you want to sell? What about an investment that has gone up considerably? Do you prefer to buy more, sell, or hold on in that instance? Answers to these questions can give you some direction in what the best approach is for you. Typically, we find that clients who can buy and hold for long periods of time give themselves the best odds for success, since in the long term, investments tend to go up in price.
Our goal is to reduce the investment gap for you – we aim to help make rational and appropriate decisions in the midst of the market’s twists and turns. If you have any questions regarding market or investment fund volatility, please reach out.
