Investors in the biggest large-cap mutual funds have been their own worst enemies since the financial crisis.
In other news, grass is green.
Investors are notoriously bad market timers, and over the past five years, it has cost them a chance at actually beating the market.
Heading into the financial crisis, investors in the 10 biggest large-cap mutual funds had the best chance of outperforming the S&P 500 over the next five years, provided that they actually stayed invested the whole time. Of course, hindsight is 20/20, and none of them could have known it at the time, so it shouldn't come as a surprise that most didn't stick it out.
Over the five-year period ended Aug. 31, which includes the collapse of Lehman Brothers Holdings Inc. in 2008, the S&P 500's 42% free fall to the bear market's bottom and its subsequent 130% rally, five of the 10 biggest large-cap-stock funds posted better annualized returns than the benchmark.
Just 37% of all large-cap-stock funds can boast the same, according to Lipper Inc.
Fidelity Contrafund (FCNTX), the third-largest fund as of August 2008, has a five-year annualized return of 7.94%, beating the S&P 500's 7.32% return over the same period.
The American Funds Washington Mutual Investor Fund (AWSHX), fourth-largest, the Vanguard Windsor Fund II (VWNFX), eight-largest, the Vanguard Primecap Fund (VPMCX), ninth-largest, and the T. Rowe Price Growth Stock Fund (PRGFX), 10th-largest, each beat the index's 7.32% return, as well.
The average investor in those funds probably isn't bragging about the funds' return at any cocktail parties, though.
The average investor return, which takes into account buying and selling behavior, for all but one of the funds was much lower because investors were busy selling, according to Morningstar Inc.
The average investor return for Fidelity Contrafund over the five-year period was just 6.16%, more than 100 basis points lower than its actual return, according to Morningstar.
The average investor returns for the American Funds Washington Mutual Investor Fund, the Vanguard Windsor Fund II and the Vanguard Primecap Fund each were less than 6%.
Only investors in the T. Rowe Price Growth Fund enjoyed the full market cycle's outperformance. The average investor return over the past five years in the fund was 8.85%, beating the fund's 8.63% return.
The investor returns underscore that patience is one of the most important qualities that financial advisers must have when using actively managed funds.
Finding a good manager, with a repeatable process, that doesn't charge outrageous fees is only half the challenge when using actively managed mutual funds. Sticking with a manager through down years may even be the biggest challenge.
After all, five years from now, it may be funds such as the American Funds Growth Fund of America (AGTHX) or the American Funds Investment Co. of America Fund (AIVSX) that are sporting the best 10-year annualized returns, even though both have underperformed these past five years.