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What caught my eye this week.

Rejoice that at some point you began reading – or even subscribed – to Monevator.

Because while our core message to invest passively, automate your savings, and then find a different hobby is a terrible business model for an investing blog, the evidence is clear its the best advice for the average person.

Just the latest salvo to scatter the hand of fund-shuffling hobbyists comes with a new ‘return gap’ survey from data giant Morningstar [Search result].

Its annual Mind The Gap survey reports investors earned about 7.7% per year on the average dollar they invested in the decade to the end of 2020.

That is about 1.7% less per year than the funds themselves delivered in total returns over the same period.

This so-called return gap reflects the wealth destruction average investors do to their portfolios by badly trading funds.

The return gap, yah

Morningstar surveyed the US, but there’s no reason to think things aren’t the same everywhere. Probably worse, in fact, given the greater inroads made by passive investing across the pond.

It’s worth stating that return gap studies do have their critics. (The similar DALBAR study in particular has been under the cosh for years). But regardless of the specific findings, the overall takeaway is sound.

In the image below, the vertical lines for each row in the graphic help to illustrate the gap between potential and realized returns for each category:

[Click to enlarge the gaps!]

How to mind the return gap

It’s especially notable that the the lowest return gap came with the Allocation fund category.

These are funds-of-funds like Vanguard’s Lifestrategy offering. They contain a mix of assets, and they do your shuffling for you as per preset rules.

Allocation funds work because you just lob money in each and every month, regardless of your hopes and fears.

And because you don’t see the sausage being made.

The average investor thinks bonds are too expensive or US equities are about to crash and takes action accordingly. Which would be fine if their timing was good – but it’s demonstrably not. Hence the return gap.

It gets even worse when you drill down into alternative and sector-specific funds – prime candidates for performance-chasing by both fund houses and the investors who belatedly get on the bandwagons the professionals set rolling.

Morningstar’s advice? Use index funds, lean on allocation funds to do your heavy lifting, avoid volatile sector-specific funds, and dollar-cost average to avoid taking a thousand nicks from poor timing decisions.

It’s not very exciting. It’s not for investing fanatics (like me). But it got my co-blogger to early retirement. For most readers it’s your best shot at achieving the same.

Have a great weekend!

From Monevator

On the plateau – Monevator

Compare funds: what to look for – Monevator

From the archive-ator: A mortgage is money rented from a bank – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Rise in National Insurance to fund boost for care and NHS – Sky / Guardian / [Search result] FT

Long delays to getting state pension being reported by many turning 66 – ThisIsMoney

Empty shelves and HGV driver shortages: Brexit eight months on… [Video]TLDR

…with missing HGV drivers also being blamed for flu jab delays – BBC

Downing Street again hints triple lock could be watered down – Guardian

UK enjoys property sales boom as prices continue to accelerate – BBC

Oxygen shortages due to Covid are disrupting the space industry – BNN

People need a £17,465 savings pot to feel secure, says Yorkshire Building Society/CEBR report – ThisIsMoney

Products and services

28 steps to get your money into shape – Guardian

How to get the best deal on a 90% or 95% mortgage – Which

Trick to getting a market-leading 1.9% on one-year savings – ThisIsMoney

Get up to £500 cashback when you transfer your pension to ii [Offer ends 30 September 2021]Interactive Investor

UK energy bills to rise after record surge in wholesale electricity prices – Guardian

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Is Chip’s new savings account any good? – Be Clever With Your Cash

Homes for sale with film connections, in pictures – Guardian

Comment and opinion

Where greatness lies – Compound Advisors

Why do we work too much? – The New Yorker

Cost versus sentimentality – Incognito Money Scribe

(Near) optimal retirement planning using machine learning [Podcast]Rational Reminder

Cash is still king, at least emotionally – Klement on Investing

Whimsical – Indeedably

Dating finances and the lessons of lockdown [Search result]FT

Blockchain for the rest of us mini-special

Bitcoin for Bogleheads – Accidentally Retired

An investor’s deep dive on Ether and Ethereum – Banker on FIRE

From the archive-ator – Should you own Bitcoin in your portfolio? – Monevator

Bitcoin futures roll costs are an impediment to any ETF [Nerdy]ETF.com

Naughty corner: Active antics

Beijing’s tech sector shock casts a long shadow [Search result]FT

Valuing China’s tech giants after the government crackdown – Musings on Markets

What shorting ETFs means for long-term investors – Morningstar

Value stocks don’t seem to be cheap for any intrinsic reason [Video]AQR

… but beware some academics now think the Value Premium was juiced – AlphaArchitect

Covid corner

Oxford-Astra vaccine technology used to design cancer-fighting jab – Sky

Long-haulers are fighting for their future – The Atlantic

What’s behind the clamour in the US for false Covid cure ivermectin? – NBC

Kindle book bargains

Stuffocation: Living More with Less by James Wallman – £0.99 on Kindle

The Basics of Bitcoin and Blockchains by Antony Lewis – £2.19 on Kindle

Captivate: The Science of Succeeding with People by Vanessa van Edwards – £0.99 on Kindle

The Smartest Guys in the Room: The Fall of Enron by Peter Elkind and Bethany McLean – £0.99 on Kindle

Get a Kindle: buy one to save money and space!

Environmental factors

American homebuyers are running towards climate change – Redfin

A cancer-quashing microbe emerges from the deep – Nautilus

What I learned renting my parents’ off-grid home on AirBnB – The Atlantic

Rural America is gearing up for a generation of change – RCM

Off our beat

Zoom dysmorphia is following people into the real world – Wired

Honesty researcher Dan Ariely retracting a study over fake data – Buzz Feed

China curbs amount of time kids can spend playing video games – Guardian

Afghan biometric databases abandoned to the Taliban – MIT Tech Review

Facebook is the AOL of 2021 – ZD Net

And finally…

“Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time.”
– Warren Buffett, The Snowball

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

The post Weekend reading: The return of the return gap appeared first on Monevator.

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