6
•
Fund Family Shareholder Association
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
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-
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
>
TIMING
BuyHigh!
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
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.
DisciplineandTimeCan
OvercomeUnluckyTiming
12/83
12/86
12/89
12/92
12/95
12/98
12/01
12/04
12/07
12/10
12/13
HaplessHarry
DisciplinedDave
$0
$40,000
$80,000
$120,000
$160,000
$200,000
Growthof Investment in 500 Index
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
