Happy Hour: Investor Returns Gap

by: Novel Investor

The returns most investors actually get are very different from the total return advertised by a fund. Put another way, the one thing driving most investment decisions - past total returns - are not what investors actually earn. In reality, investors earn less, and in some cases, a lot less than the total return advertised by a fund.

Morningstar updated its report on the investor returns gap late last week (download the full report at the source link below). The report found that investor returns for the 10-year periods ended 2012 to 2015 fell short - on average - by 1.13%.

Much of the gap is due to investors being consistently late to the party. It's a self-inflicted cost that not enough people consider. They buy a fund after it performs well and sell after it performs poorly.

The table below shows the 10-year returns gap between total return and investor return for different types of funds.

10 Yr Returns Gap

As the study lays out, several things contributed directly or indirectly - via driving poor behavior - to lower investor returns:

  • Low-cost funds exhibit smaller investor return gaps than high-cost funds and the margin can't be explained by fee differences alone

  • Funds from shareholder-friendly firms are less likely to whipsaw investors than funds from less shareholder-friendly firms

  • Volatile funds (when compared with others in that asset class) are much harder for investors to handle than less-volatile funds

  • Funds with high tracking error can be associated with large investor returns gaps

One of the simplest changes investors can make to reduce their returns gap is to stick with low-cost funds over time.

Morningstar: Mind the Gap 2016

Last Call

  • Interview with Professor Richard Thaler - Spectator

  • Sherlock Holmes on How to Be a Better Investor - T. Housel

  • Why Passive Investing Increases Corporate Activism - Wharton

  • To Win With "Smart Beta" Ask If the Price Is Right - R. Arnott

  • Last Week Tonight: Retirement Plans (video) - J. Oliver

  • Q&A with Henry Kravis of KKR - Bloomberg

  • Can Netflix Survive in the World it Created - NY Times

  • George Washington's Practical Self-Education - Farnam Street

  • Getting Smarter - Aeon

  • Steph Curry Literally Sees the World Differently Than You Do - NY Mag