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.
