How investors respond to a longer-term view
A small change in how retirement funds display past returns can prompt households to take more risk
- Investors pay attention to a fund’s past performance. How investment funds present their past returns—whether as one-month or 12-month returns—can significantly affect how much investors trade and how much risk they take, according to research by Chicago Booth PhD candidate Maya O. Shaton.
- The research exploited a change in Israeli regulation. Prior to 2010, retirement funds often displayed one-month returns in investment materials and advertising. But starting in 2010, Israeli regulators prohibited retirement funds from prominently displaying returns for periods less than 12 months, although investors could still compute the shorter-horizon returns from available data. Mutual funds were not subject to these regulations.
- Under the new rules, trading volume in retirement funds fell by approximately 30 percent compared to the mutual-fund group (see chart). Shaton’s research suggests households are more likely to react to “attention-grabbing,” one-month returns than typically smoother 12-month returns.
- Households shifted their retirement savings into riskier funds following the change in rules. Losses tend to be more prominent when observed at shorter horizons, so viewing 12-month returns instead could have increased households’ appetite for risk.