Are You a High Net Worth Investor?

Almost daily we recieve solicitations from companies wanting us to sell their products, and advising us on how to "target" high net worth individuals.

Are you a high net worth individual? Are you tired of being "targeted" by commissioned based agents/advisors? Many firms specialize in targeting individuals with $250,000 or more to invest.  (Trust us, we can buy lists of these exact prospects).  These individuals are vulnerable to salespitches that are not necessarily designed for their best interest.  Held capitive by commission based compensation, the typical advisor has strong incentive to close the sale and make sure their bills get paid.

 Maybe you don't think of yourself as a "High Net Worth" individual.. but you are if you have $250,000 or more in your 401K or other investable assets. If you want a prudent no-nonsense approach to managing your "nest egg" maybe you should learn about the Veritas approach.

What is the Real Rate of Return?

One of the intriguing paradoxes in investing is the difference between a fund’s reported return, and the personal rates of return for the people that own that fund.  For example, fund x may have earned 10% in the last 3 years on average, but, what did the “average” investor in that fund earn over the same time period?  The difference may be surprising to you.

Let’s look at a stalwart fund of the broker sold community: The Growth Fund of America.  If you look up the fund on any internet based reporting service, you notice that its five year return is 3.73% per year.  Not bad considering that time period held some of the 2008 downturn.  But what does that number mean?  That is not the return of the average investor, it is simply the return of the fund.  For an investor to have earned that, they would have had to buy the fund on day one, held it entirely, and still have been holding it at the end of the five year period.  As advisors and investors, what concerns us is INVESTOR return, not fund return.  The average investor return over that same period was only 1.18%!   That means that if we look at all of the investors that held that fund during that five year period their average return was only 1.18% per year. 

How could that be?  Well, here again we see that investor behavior trumps the many other factors that contribute to successful investing.  Over that five year period, investors in that fund continued to engage in many of the bad behaviors that investors fall prey to, among them likely market timing and track record investing.  But this is not something that we only see at American Funds.  Fidelity Growth company has a five year return of 7.04%, while its five year “investor” return is only 3.86%.  Here again, investor’s fail to get their full rate of return because of a lack of discipline; discipline which can only be acquired through a commitment on the part of the advisor and client to lifelong investor coaching. Without it, investors do and will continue to leave money on the table.

And now, for a truly amazing thing.  Do you know that an investor in a fund can actually earn MORE than the fund itself?  Take for example a fund that many of our clients own internally in their own portfolio, DFA US Small Cap.  Its five year fund return is 9.44%, while the INVESTOR return over that period was 10.22%.  Can you figure out how this can possibly be?  We’ll have the answer in our next newsletter.