Monday, October 09, 2006

Slow and steady still wins the investing race - MarketWatch

Thanks to the Unknown Professor over at Financial Rounds for pointing this one out.

Short version: Morningstar is going to report the dollar-weighted returns! And shock of all shocks, these are lower than the time weighted returns.

Slow and steady still wins the investing race - MarketWatch:
"...Morningstar, Inc...announced that it was going to start reporting mutual funds' returns in a new way, in addition to all the traditional ways for which Morningstar is already famous. The firm is referring to this new performance metric as the 'Morningstar Investor Return,' and it directly measures the price investors have paid for failing to be patient and disciplined. A fund's Morningstar Investor Return is what statisticians refer to as a dollar-weighted return...."
What is the difference? The dollar-weighted return is closer to what the average investor actually earned than what the fund earned over time. So if a fund is up in one year and attracts much new money, then is down the next year, the simple average will overstate the return investors actually earned (i.e. the dollar-weighted average will be lower than the time average).

The article has a great example to understand the difference between this and what is largely reported. It also makes a strong point against "chasing returns".

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