Do UK retail investors buy at the top and sell at the bottom?

In this paper we examine market level data on the net investment into broad categories of UK mutual funds (known as unit trusts) collated by the Investment Management Association (IMA). We use these data to calculate a measure known as the 'performance gap' that is used by both Friesen and Sapp (2007) and by Dichev and Yu (2009). Our data spans the period from 1992 to the end of 2009 and therefore represents a significant sample period over which to study this phenomenon.

Our results are broadly in keeping with those of previous research in this area, which has been achieved using US mutual fund data. The UK data that we use here suggest that on average the investment timing decisions of retail investors with regard to equity mutual funds has cost them performance of just under 1.2% per year over the eighteen year period of our study. Although 1.2% may not sound very high, compounded over 18 years it represents a cumulated under performance of 20%, compared with a simple buy and hold strategy. We also distinguish between retail and institutional equity mutual fund flows in this paper and find that the performance gap we measure is largely a retail investor rather than an institutional investor phenomenon. Finally, however, we find evidence to suggest that the performance gap with regard to bond mutual funds is positive, that is, investment timing decisions with regard to bond mutual funds have enhanced the return experience of the median investor.

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