The Most Impressive Behavior Gap in the Mutual Fund Industry

I spend a lot of my time writing about the common mistakes made by investors because I operate under the assumption that cutting down on unforced errors could drastically improve portfolio performance for the majority of investors.

The behavior gap between reported fund returns and actual investor returns that results from poorly timed purchases and sales is probably the most pervasive problem facing investors these days. Well-known funds such as the Fairholme Fund and MainStay Marketfield have both had impressive runs in the past decade but most of the investors in these funds didn’t get to come along for the ride. Most of the money poured in after periods of outperformance and left after the ensuing underperformance, causing ever widening behavior gaps.

But not all investors make repeated mistakes and not all behavior gaps are created equal. Case in point is the Vanguard Total Stock Market Index Fund (VTSMX). This is a simple, low-cost fund that is designed to track the entire U.S. stock market. There’s nothing fancy about it. Take a look at the historical return numbers through the end of January:

Behavior Gap

Over the past 15 years investors in the fund, as measured by dollar-weighted returns, have actually outperformed the reported fund returns by more than 2% per year. This means investors in an index fund have outperformed the stock market for a decade and a half by more than 200 basis points, something most professional investors could only dream of. The 5, 10 and 15 year investor returns all rank near the top decile in performance numbers when measured against the fund’s peers. These are the kinds of returns the fund management firms should be shooting for — successful results from actual investors in their funds.

Why have the investors in this fund been so successful? It’s hard to say for sure, but here are my thoughts:

  • It’s an extremely simple fund strategy. There are no real surprises and investors know exactly what they are getting — low-cost beta exposure to the U.S. stock market. More exotic strategies tend to lead to worse behavior gaps.
  • This fund is probably a core holding for many. Some investors go for the core-and-explore approach by keep a large portion of their portfolio in a core holding — in this case a total market fund — and using the remaining allocations to take more risk or search for other opportunities.
  • A migration from active funds to index funds. Index investing has seen substantial growth over this time frame. You have to assume many of the flows into this fund are because of this change in investor allocations and the growth of Vanguard in the fund industry.
  • Investors have learned their lesson and have cut down on performance chasing?

I put a question mark on the last bullet point because I’m not so sure about that one. Indexing doesn’t solve all of your problems as an investor. I have a feeling that many of the investors that have jumped on the passive investing bandwagon recently are going to find this out the hard way in the coming years. It doesn’t matter what kind of funds or strategy you rely on if you can’t implement it over a variety of market cycles.

But I do find it encouraging to see positive investor results, no matter how the funds are allocated. Hopefully this is a trend that continues.

Further Reading:
GLD’s Fall From Grace
Should Fund Managers Care About the Behavior Gap?
 Learning From Vanguard Investors



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Discussions found on the web
  1. Ryan commented on Feb 24

    Investor returns are simply the fund return weighted by assets at that point in time.

    This makes a lot of sense when you consider that the US stock market has performed exceptionally well recently, and passive investing has taken off as well (meaning that recent performance is more heavily weighted).

    VTSMX has seen ridiculous AUM growth, which means most of the $ have only been around for 2010+, not the 2000-2008 massacre. You will note that investor return becomes lower than the fund return when that distortion is removed (in shorter time periods).

    No market timing or successful investors here, just a natural consequence of AUM growth into a bull market.

    • Ben commented on Feb 24

      Yeah that 15 year number is probably an aberration. Now that the fund is so large it should be easier to track going forward.

  2. DS commented on Feb 24

    Where do you get the investor return from? Is is available for all funds?

    • Ben commented on Feb 24

      Good question. Go to Type in the ticker (mutual funds only, not ETFs). Click on the Performance tab. Near the top will be a link that says Investor Returns which will take you to the page where I got this data.

  3. MikePasieka commented on Feb 25


    First off, let me begin by saying I was a huge fan of your article on commodities – great stuff.

    The conclusions you drew from the example above are very dangerous and false.

    “Over the past 15 years investors in the fund, as measured by dollar-weighted returns, have actually outperformed the reported fund returns by more than 2% per year. This means investors in an index fund have outperformed the stock market for a decade and a half by more than 200 basis points, something most professional investors could only dream of.”

    Investors in the fund and the dollar weighted returns are two distinctly different things. Rather than ‘Investor Returns’, Morningstar may want to rename it ‘Money-Weighted Returns’ to remove any ambiguity. Investors have not outperformed the reported fund returns by more than 2% per year and have not outperformed the stock market for a decade and a half by than 200 basis points. The money weighted return and total return are not the same and no owner of VTSMX outperformed its total return. Investors earned the total return.

    The money weighted return weighs a portfolio’s performance based on the return of the portfolio and the amount of assets under management. As VTSMX gathered assets over the years, net of market appreciation, the weight of the most recent performance of the fund is weighted more heavily than before this six year bull run.

    Please see the ‘Differences between time-weighted and money-weighted returns’ section of the following link if you need any more clarification:


    • Ben commented on Feb 25

      I understand the difference. There’s no easy way to measure this. All methodologies are flawed accept the individual’s statement.

    • Clay Jennings commented on Feb 27


      When you write, “no owner outperformed the reported fund returns by more than 2% per year” you are being a bit disingenuous I think. A single dollar invested on 2/01/2000 would have grown by a CAGR of 4.85% in the succeeding 15 year period. However, a hypothetical investor that invested a single dollar on that date and then proceeded to maintain his/her proportional share of fund assets over the succeeding 15 year period, would have earned a CAGR of 7.00% per dollar invested. I would argue that the 7.00% figure is more representative of the growth of the hypothetical investor’s assets than the 4.85% figure. In this sense, this hypothetical owner did outperform the more widely reported total return figure. Hypothetical, yes, but certainly some investors in the fund fit something close to this profile.

      This said, I think the total return vs. investor return comparison does speak more to the overall composition of the entire investor base for a particular fund than it does to the experience of any single investor. Vanguard investors tend to rebalance more effectively than other investors and tend to chase performance less, which has the natural effect over time of increasing investor returns as a whole for a fund vs its total returns. Especially in a time period such as the last fifteen years that has seen immense volatility, historically, with two significant market contractions and a nearly unprecedented bull market.

  4. Weekend Reading: High Mutual Fund Fees Edition commented on Feb 28

    […] We’ve all heard of the behaviour gap – the difference between investment returns and actual investor returns. Ben Carlson looks at a Vanguard fund where investors actually outperformed the index. […]