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Markets ETF over the five years through February 2014was 3.7% vs. a market returnof15.6%,which suggests investors fared worse than my initial calculation. Unfortunately, investors in European IndexandPacific Indexprob- ably didn’t capture returns in excess of the funds’ market returns as the table suggests. The investor returns for European ETF and Pacific ETF over the five years through February 2014 were nearly spot-on with the market returns of the ETF shares—19.6% vs. 19.8% and 14.9% vs. 15.2%, respec- tively. For our purposes, the fund’s return is the relevant number to examinemost of the time. It is the fund’s return that tells the tale of a manager’s skill—not the investor return.A fundmanager has WITHU.S. STOCKS at or near all-time highs, some investors are asking if they should wait for a pullback before put- ting money in the markets. Nobody wants to invest at amarket peakonly to start losingmoney from the get-go. But should the fear of a potential loss keep us on the sidelines? No. In fact, even if youwere “lucky” enough to have invested at themarket’s highs in each of the last 30 years, your end result was still satisfactory as long as you held the course. Let’s compare two investors: DisciplinedDave andHaplessHarry. Both Dave and Harry invest $1,000 in 500 Index at the end of 1983. Each and every year for the next 30 years, they both invest an additional $1,000 in the fund. Disciplined Dave simply adds his money on the last trading day of every year. Hapless Harry tries to pick his spots, but he easily lays claim to having the worst timing in modern Wall Street history, and ends up adding his $1,000 at the fund’s highest price each calendar year. It’s pretty obvious that Disciplined Dave should have a lot more money at TIMING BuyHigh!

sions impact the returns we realize, and unfortunately, inmost cases, inves- tors’ trading activity is harmful rather than helpful, though I would argue that Vanguard investors are better thanmost atminimizing this cost. The lesson is that it not onlymatters what investment you own, but when and how you own it. You might have identified the greatest manager or the top-performing index in the world, but if you are trading in and out, you may not be capturing all of the possible returns. Ask yourself, “Am I a trader, or an investor?” I think you’ll make more money if you act like an investor and stickwith your investments for the long term. In fact, maybe the “inves- tor return” should really be called the “trader return.” n For all his bad luck—his timing could not have been any worse— Hapless Harry ended up with only $8,023 less thanDisciplinedDave. What can we learn from Hapless Harry?Despitehispoor timing,Hapless Harry did have a few things going for him. Harry stuck to a regular invest- ment plan. Even though every trade he made immediately lost money, Harry, likeDave, was disciplined and invested $1,000 every year. Harry also never panicked—hedidnot sell a single share. Finally, Harry had a long time-horizon. The lesson is that timing isn’t every- thing. Spending time in the market, which means being disciplined, con- sistent and staying focused on the long run, goesa longway towardsmakingup for unlucky timing.And in reality, your luck can’t be as bad asHaplessHarry’s. Yes, wemay be at amarket top. But wewon’t know that until after the fact, and what might be a market top could just as easily be a pause before a rally to higher highs. If you are on the side- lines, take a lesson fromHaplessHarry, andmake a plan toget in the game—as a long-term investor. n

limited ability to control when inves- tors buy or sell their fund and in what quantities, sowe shouldn’t penalize (or reward) them for that. Sowhy spend all this time on inves- tor returns? First, it can help set expectations when investing in a fund. Say you are considering an investment in Capital Value. The gap between the fund’s return and the investor return signals that most investors have had a difficult timewith the fund—either buying after runs of strong performance or selling after a cold streak. If you know from past experience that you find it hard to stick with a fund like that, you may want to look elsewhere. Second, looking at investor returns is a reminder that our buy and sell deci-

DisciplineandTimeCan OvercomeUnluckyTiming

$200,000

HaplessHarry DisciplinedDave

$160,000

$120,000

$80,000

$40,000

Growthof Investment in 500 Index

$0

12/83

12/86

12/89

12/92

12/95

12/98

12/01

12/04

12/07

12/10

12/13

the endof 30years thanHaplessHarry, right? Well, Dave compounded his money at a 9.9% annual rate, turning his $31,000 into $177,176 at the end of 2013 (including his final contribution at the end of that year). Harry, despite his unfortunate timing, compounded his money at a 9.5% rate, and ended up with $169,153 (also including his final contribution, coincidentally, made at the market’s high on the last day of the year). As a frame of reference, 500 Indexcompounded at a10.9% rateover this 30-year period.

6 • Fund Family Shareholder Association

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