Marvin Steinberg was a psychologist who founded the Connecticut Council on Problem Gambling. During his career, he made some uncomfortable observations about the behavior of stock market investors. In many cases, he felt, investors’ behavior veered awfully close to gambling.

This is the sort of observation that seems like it could be true but also seems difficult to quantify. So I was interested in a recent study by Morningstar analyst Jeffrey Ptak.

Ptak wanted to examine investors’ experience with so-called thematic funds. These are funds designed to take advantage of a trend, such as artificial intelligence, green energy or cybersecurity.

In theory, these funds make sense: If there’s an area of the economy that’s growing, then it seems like it would be obvious to invest in it. But that’s not what the numbers show.

In his analysis, Ptak conducted two sets of comparisons. First, he looked at investors’ returns in thematic funds compared to the S&P 500. But since the S&P 500 has done so exceptionally well in recent years, and thus represents a high bar, Ptak also compared thematic funds to a set of more broadly diversified stock funds.

The findings? During the period studied—the three years ending November 30, 2024—the S&P 500 returned an average of 11% per year, while the more diversified stock funds returned 7%, on average. The thematic funds, in contrast, lost an average of 1% per year over that time period.

That would be bad enough, but then Ptak looked at what’s known as dollar-weighted returns. This is a methodology that seeks to capture investors’ actual returns in an investment. It does this by taking into account not only an investment’s returns but also the timing and magnitude of investors’ purchases and sales of that investment—in other words, their trading decisions. The results were sobering: On a dollar-weighted basis, investors in thematic funds lost 7% per year—far worse than the S&P 500’s gains of 11% or the diversified stock funds’ gains of 7% per year.

To quantify that, if you had started with $10,000 and invested it in the S&P 500 for the full three years, you would have ended with nearly $14,000. If you’d invested it in the diversified stock funds, you would have ended with about $12,000. But if you’d invested in the thematic funds, your investment would have dropped to just $8,000.

What explains these results? Ptak cites three factors. First is valuation. Fund companies have a knack for timing the rollout of new funds to take advantage of trends that are in the news. The problem, though, is that the stocks of the most popular companies at any given time often end up being overvalued. But they don’t stay overvalued. After a time, stocks that have been driven up to unreasonable levels often fall back down into more reasonable territory.

The result: Thematic funds tend to be rolled out precisely when valuations are at their highest, attracting investors just in time to see the bubbles deflate. In Morningstar’s research, that explains approximately half the underperformance experienced by thematic fund investors.

The other half of the performance gap was explained by investors’ timing decisions. On average, thematic fund investors tended to buy at high prices and to sell at low prices. While unfortunate, this makes sense. If the pattern of these funds is to launch when prices are peaking, then it’s understandable that investors quickly regret their decisions and head for the exits.

In fairness, Ptak points out, there is almost always a gap between a fund’s total return over a given period and its dollar-weighted returns. That’s because investors are always buying and selling shares for their own reasons. Sometimes they’re investing new savings, and sometimes they’re withdrawing funds to meet expenses. But the difference is typically much smaller. In this study, the gap between the funds’ returns and investors’ returns in the diversified stock funds was 0.65%—much less than the 6% gap experienced by investors in thematic funds but still not zero.

What about fees? Thematic funds are much more expensive than standard index funds, costing 0.77%, on average. By way of comparison, the best index funds these days cost less than 0.05%.

In addition to the most obvious conclusion—to avoid investing in “shiny object” funds like these—what other lessons can we draw?

In 1987, a Harvard psychologist named Paul Andreassen conducted a study that has earned him a place on the Mount Rushmore of investment research. He created a simulated trading environment and gave participants funds to invest.

Andreassen split participants into two groups: The first received regular news on their investments and were permitted to make trades based on the information they received. The second group were also permitted to trade if they wished, but didn’t receive any news on their investments.

The counterintuitive finding: Those who received no information on their investments ended up making better trading decisions than those who were better informed. More information, it turns out, causes investors to place more frequent trades, and these trades end up being counterproductive. Why? Successful stock trading requires investors to be right twice: First, they need to make the correct investment choice, then they also need to time their trades correctly. In other words, an investor can buy the right stock at the wrong time and still end up losing money.

Andreassen’s research, I think, helps to explain Morningstar’s findings on thematic funds. To make money in the market, it seems like the right thing would be to make decisions based on current trends. But for the reasons Ptak identifies, this turns out not to work. In fact, it’s one of the more effective ways to lose money.

What’s a better way to make investment decisions? The research is clear: As intuition would suggest, and the data confirms, the most important decision is the split between stocks and bonds in a portfolio. While “hot” stocks get all the attention, our best bet, on average, is to avoid what’s in the news and instead to focus more on the seemingly more mundane asset allocation decision.​