Most people always look for the best performing fund, but they don't know that the best performing fund doesn't always give them the best return. Often, investors are attracted by the return without knowing why it performed and whether it can still perform. Chasing after past performance often actually leads to underperformance.
Take the case of the CGM Focus Fund, one of the best performing funds from 2000 to 2009. While the fund delivered an impressive 18% per annum, their investors realised -17% per annum, a whopping 35% difference.
CGM Focus' trailing 10-year return suggests that a $10,000 investment a decade ago would now be worth $51,633. The fund's trailing 10-year Investor Return over that span, however, suggests that the same $10,000 shriveled to $1,585! The difference--all $50,048 worth--is attributable to investors' repeatedly mistiming their purchases and sales in chasing performance.
Unfortunately, this is not unique to those who encounter outperforming funds. The average investor also underperforms passive investment solutions by up to 6% per annum. It is ironic that as investment managers strive to deliver incremental returns over passive investments, there is such a glaring performance gap for investors that is not being addressed.