Fund News: Good or Bad?

There’s news about mutual fund investors. In fact, two stories have emerged in the past few days. But is the bottom line good or bad?

The Wall Street Journal, citing reports from fund companies and Morningstar Inc. (Stock Quote: MORN), says investors have begun tip-toeing back into stock funds. Many fled after the market tanked in 2008.

It’s a pretty cautious move. About $2.7 billion flowed into U.S. stock funds in January, following outflows in the previous four months. And about $8.1 billion went into international stock funds, the biggest inflow since the end of 2007.

Those figures pale next to the $28 billion that went into bond funds in January.

Meanwhile, Morningstar has reported on a new study that shows investors haven’t shaken a longstanding bad habit – buying high and selling low. They kept it up through the “aughts,” the decade that just ended.

“The grand total for the average investor in all funds in the aughts was a 1.68% annualized return, compared with 3.18% for the average fund,” Morningstar said.

In other words, an investor who stuck with the average fund through thick and thin for the entire decade would have made 3.18% a year. But the average investor actually made only 1.68% a year. That’s because investors tend to put money into a fund after it has done well, missing the biggest gains and often suffering losses as the fund retreats from its peak.

Morningstar figures the investor returns by studying cash flows in and out of individual funds.