Academics say that one of the key motivating factors for investors is a fear of being left behind and missing out on gains others are making, which means they often rush to put their money into the market when they think it is on the way up.
However, this approach means ordinary investors inevitably end up chasing returns in the sector that has just made money, meaning that they are likely to be late to the party.
It also means that they end up trying to time the market, which essentially means being better judges of what is likely to do well than thousands of full-time professionals.
FE Analytics data shows that investors who stick with low-volatility "steady eddies" can do better over the long-term than those that chase the highest possible returns.
Performance data can be misleading in the short-term, and some of the funds that are lagging in the market rally could be better bets in the long-run.
A strong performance in 2008 is key to the five-year figures of many of the funds that sit on top of the mixed-asset sectors.
Data from FE Analytics shows that CF Miton Special Situations is one of only nine UK retail funds to have beaten the FTSE All Share over 10 years with a volatility of less than 10 per cent per annum.
Performance and volatility of funds over 10-yrs
| Name | Member of | 10yr returns (%) |
Annualised Vol. % |
|---|---|---|---|
| CF Miton Special Situations | Flexible Investment (137) | 218.6 | 6.74 |
| CF Ruffer - Equity & General |
Flexible Investment (137) | 206.04 | 8.69 |
| Ecclesiastical - Higher Income | Mixed Investment 40%-85% Shares (197) | 190.1 | 7.7 |
| McInroy & Wood - Income | Mixed Investment 40%-85% Shares (197) | 181.56 | 9.43 |
| Newton - Real Return | Absolute Return (56) | 174.89 | 9.1 |
| CF Ruffer - Total Return |
Mixed Investment 20%-60% Shares (202) | 170.42 | 6.85 |
| Jupiter - Merlin Balanced | Mixed Investment 40%-85% Shares (197) | 169.44 | 10.21 |
| Trojan |
Flexible Investment (137) | 168.34 | 7.39 |
| Invesco Perp - Monthly Income Plus |
Sterling Strategic Bond (65) | 154.41 | 7.6 |
Source: FE Analytics
The fund has produced the best returns of any to have achieved this feat: 218.6 per cent. Over the same period the FTSE All Share has made just 152.19 per cent.
One major reason for this excellent track record is the fund’s performance in 2008. It made 7.26 per cent while the FTSE All Share lost 30.12 per cent.
Unsurprisingly, a number of other funds on the list also managed positive returns in that year.
CF Ruffer Equity & General made 7.33 per cent, the Trojan fund 1.11 per cent and Newton Real Return rose 3.98 per cent.
The best performer was the CF Ruffer Total Return fund, which made 20.86 per cent.
Most of the funds have underperformed in 2013 so far, however, and all but three have underperformed over the past year.
However, their long-term records suggest that selling them could prove to be a mistake.
IM Matterley Regular High Income was launched in 2006, so does not yet have a 10-year track record.
The fund has lagged the IMA Mixed Investment 0%-35% Shares sector in the recent rally, having returned just 6.12 per cent over the past year.
However, the £49.5m fund, which has five FE Crowns and is managed by Chris Evans and Chris Harris, is the single best-performing fund in the sector over five years, up 44.3 per cent.
This is largely due to the fund’s outperformance in 2008 when the sector lost 10.7 per cent, compared with just 3.14 per cent from the fund.
Even in high-growth areas, the funds that do best in the long-run are often those that protect better on the downside.
Neptune UK Mid Cap, for example, sits on top of the IMA UK All Companies sector over three years, with returns of 82.57 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Part of the reason is that the fund invests in the high-growth mid cap area, which is also more volatile.
Many other funds do this as well, but what has led the Neptune fund to beat those is the more cautious approach it takes.
In 2011 it was the fifth-best performer in the entire sector, losing less than many large cap funds, which theoretically should have been less volatile.
The FTSE All Share was down 3.46 per cent, but Neptune UK Mid Cap made 3.65 per cent.
In 2013 so far Neptune UK Mid Cap sits in the second quartile of the sector, having made just 10.38 per cent.
Liontrust Special Situations is another top-performing fund that benefits from doing well in the bad years.
The fund has the second-best figures of any in the sector over both three- and five-year periods, having more than doubled investors’ money over the longer period.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Over five years it has made 113.52 per cent compared with 30.9 per cent from the sector and 32.73 per cent from the FTSE All Share.
The fund trailed the sector in 2007, when many funds made big gains, but was a top-quartile performer in 2008.
It had the best returns of any fund in the sector in 2011, making 7.54 per cent.