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Your Investment Returns May Not Be Your Managers Fault: Dollar vs. Time Weighted Returns – Finger Financial Five #93

Jeremy
Jeremy

“Patience is not simply the ability to wait, it’s how we behave while we’re waiting. – Joyce Meyer

Wouldn’t it be nice to own the top performing mutual fund for a decade?

Surely if you did this, that would be the answer to any underperformance you may have, right?

Maybe not…

In the Wall Street Journal article, “How a Mutual Fund Can Win, But Investors Still Lose (Dec 10,2015), it was pointed out that the top performing fund over the decade ending 2009 made +18% annually. The investors in the same fund lost -11%! 

How?

Your return can be way different than the manager’s return. The manager’s return is time weighted and your return is dollar weighted.

Time weighted is what the manager did over a period of time.

Dollar weighted takes into account how much money you add to or withdraw from the investment and the price paid or received each time.

For example:

You invest $10 in a hypothetical investment at $10 a share. That share grows to $15, where you invest $100 (6.66 new shares). At the end of the time period, the shares are $16.

The investment return or time weighted return is 60% — $10 to $16.

Your dollar weighted return is $10+$100=$110 total investment for 7.66 shares, each is worth $16= $122.56 total current value.  You invested $110 now worth $122.56, that’s $122.56/$110 for a total return of 11.4% not 60%.

How did the average investor lose -11% in the fund above? Many investors bought high and sold low, so their return was much less than the manager. Their dollar weighted return was -11%.

Think of this like cooking rolls. If you don’t leave them in long enough, your rolls won’t rise. The instructions may say cook for 10 minutes (think long term investing), but many investors want to check the oven every 30 seconds (checking account values daily) and take them out in 5 minutes (sold investments too soon). They wonder why their rolls didn’t rise.

If you have questions, email me at [email protected] or click here for a phone appointment.

On the lighter side, I made it to Bulgaria over 60 hours of travel versus 24 normally. Thank goodness for Netflix and headphones.  Sometimes rolls take longer to cook.

Hope all is well with you and your family,

Jeremy

Finger Financial Five – 5 points in 5 minutes or less – is to provide you with a weekly shot of useful financial information.  My intention is to share principles, so that you will have more clarity and peace, that help you make better financial decisions.

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA Riverbend Wealth Management.

This content is developed from sources believed to be providing accurate information and provided by Riverbend Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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