Although few funds have cash-flow stories as dramatic as CGM Focus', Morningstar studies have found that investors across all fund types - both stocks and bonds - have paid a price for being fickle.
The damage is greater on the stock-fund side, especially with volatile sector and region-specific funds, in which volatility and temptation are highest. In the natural resources category, for example, Morningstar data show that an investor who bought and held an average-performing fund in the category would have pocketed a very robust annualized total return of 14% in the 10-year period through 2010. But due to poorly timed purchases and sales, actual investors in natural resources funds gained a less impressive 8.7%. Investors in the Latin America and Pacific Asia ex-Japan categories have left even more money on the table due to poor timing decisions. Not surprisingly, both groups have logged periods of exhilarating performance as well as periodic sell-offs. It's easy to get caught up in the excitement of a go-go fund's performance. Don't-don't.
Clearly, emotion has a way of interfering with reason. That's why dollar-cost averaging can be such a good idea. Sure, it's possible to make more money with a lump-sum investment. But it's also possible to make less.
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