Index Fund Investors Remain Steady, Reap Higher Returns

Index fund investors tend to adhere to the adage of invest for the long term, and it pays off, The Wall Street Journal reports.

Equity fund investors, on the other hand, are more inclined to trade in and out of their funds, in search of higher returns that they rarely achieve because of poor timing. As a result, index fund investors lag the returns of they funds in which they invest by just 0.46 percentage points, whereas equity fund investors trail their funds’ average returns by 1.7 percentage points, according to research by the Zero Alpha Group. The financial advisory association’s study examined the returns of 6,000 funds over 14 years ending in 2004.

“The index fund investor is somebody already predisposed to be a buy-and-hold investor who’s not trying to beat the market,” said Mercer Bullard, founder of FundDemocracy.com and co-author of the report. By buying an actively managed equity fund overseen by a portfolio manager whose mission is to beat the market, investors in those funds tend to assume the same mentality—and trade in and out of those funds, Bullard added.

However, investors in no-load index funds trail the average returns of the funds they hold by 0.42 percentage points, whereas investors in load index funds fall 1.1 percentage points behind each year, according to Zero Alpha.

“Our results sound a warning to fund investors who are considering whether to attempt market timing, either on their own initiative or through their broker’s advice,” according to the report.