Are You A FOODIE?

Get To Know Your Investment Style

On the Money

by Ben Reynoso

Have you discovered the best way to invest is to take stock in yourself and your personal style? Getting to know what your goals are and how you can reach them is the secret to understanding yourself as an investor. Having a good handle on your behavior while you are on the investment journey to your goal will be the key to your success.

The period of time from 2000-2009 was labeled “The Lost Decade”.   The Wall Street Journal wrote an article back in March in which they noted that the S&P 500 had delivered essentially no return over the past ten years.

But did you know that the there was a fund that had an average annual rate of return of 18% during the same time period?

Meet the best Stock Fund of the Decade:  CGM Focus Fund. (See Flip through for Charts and Graphs)

The following saga of the best performing fund of the decade proves one thing. The dominant determinant of real-life, long-term investment outcomes is not investment performance; it’s investor behavior.

On December 31, 2009, the Wall Street Journal detailed the top performing mutual fund of the last ten years.  However, we all know that past performance is no guarantee of future results. But this article showed that past performance is also not a guarantee of investor success.

The decade’s best-performing U.S. diversified stock mutual fund: the $3.7 billion CGM Focus Fund rose more than 18% annually.  This achievement (in a flat to down market) is all the more remarkable because the said fund totally smoked the second-best performer by an astronomical 3.40%.

Don’t kick yourself for missing out of those returns. So did literally everyone else, including—and especially—the CGM Focus Fund’s average shareholder during these ten years.

The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30, 2009, according to investment research firm Morningstar Inc. These investor returns, also known as dollar-weighted returns, incorporate the effect of cash flowing in and out of the fund as shareholders buy and sell. Investor returns can be lower than mutual-fund total returns because shareholders often buy a fund after it has had a strong run and sell as it hits bottom (i.e. chasing returns).

The CGM Focus results show how even strategies that work well don’t always pay off for investors. The fund, a highly concentrated portfolio typically holding fewer than 25 large-company stocks, offers “a really potent investment style, but it’s really hard for investors to use well,” says Christopher Davis, senior fund analyst at Morningstar.

In 2007, the fund surged 80%. Investors poured $2.6 billion into CGM Focus the following year, only to see the fund sink 48%. Investors then yanked more than $750 million from the fund in the first eleven months of 2009, though it is up about 11% for 2009.

“A huge amount of money came in right when the performance of the fund was at a peak,” says Mr. Heebner, the fund’s manager since its 1997 launch. “I don’t know what to say about that. We don’t have any control over what investors do.”

Is the CGM Focus Fund bad?  No.  Investors were looking at trying to get the highest return for their money but they forgot about the risks.  As soon as the fund began to lose money, they got out and lost money.  Chasing returns is a recipe for heartburn.

In other words, this performance came with the kind of undiversified volatility that the average investor found hard to stomach and stay invested through.

While some investors crave superior returns from their investment, the real truth is most of us just want to go from Point A to Point B and make it there safely.  So what that we earn less than our friends, co-workers, or neighbors; because the chief aim of investing is to help you reach your goals.

There will always be stocks, mutual funds, or strategies that outperform yours, but you need to find one that fits you – your personality, your style – and one that you can stick with in good and bad times.