The Investment Scientist

The Puzzle of Investment Return vs Investor Return Solved

Posted on: February 17, 2018

If you go to the Morningstar website to do research on a very popular fund, the Vanguard S&P 500 Index Fund or VFINX, you may find this information after some digging around:

Screen Shot 2018-02-17 at 6.28.32 PM.png
The Investment Return is basically what the fund produces. (If the fund is a S&P 500 Index fund, then its investment return is basically synonymous to what the market produces.) The Investor Return is what the average fund investor receives. So why on earth would the typical investor get less than half of what the fund produces?

The answer is actually pretty simple: most investors just don’t have the mental wherewithal to stay in the market when it drops. They pulled out at the bottom of the market, thereby missing much of the rebound rally in 2009. See this fund flow chart below.

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This is where an experienced financial adviser can help. Let’s look at the fund vs. investor return of DFQTX, a DFA fund that is only available to investors through a DFA authorized adviser like myself.


Screen Shot 2018-02-17 at 6.28.44 PM.png

Note that unlike VFINX investors, the typical DFQTX investor has higher investor return than fund return. Why? The answer to this question is also very simple:  under the guidance of a DFA authorized adviser, the typical DFQTX investor was able to rebalance his portfolio thereby loading up on cheap equity when the market was giving a greater than 50% discount (which is a better way to view a market drop.)

I rarely like to talk about the value of an experienced fiduciary adviser. But here it is – I can’t even hide it: over the past ten years, the investor return difference is 6.62% a year when the investors have a DFA authorized adviser!

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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