We Eat Dollar Weighted Returns — III
Thursday, February 2nd, 2012Somebody notify the Bogleheads, they will like this one, or at least Jack will. Yo, Jack, I met you over 15 years ago at a Philadelphia Financial Analysts Society meeting.
How bad are individual investors at investing? Bad, very bad. But what if we limit it to a passive vehicle like the Grandaddy of all ETFs, the S&P 500 Spider [SPY]? Should be better, right?
I remember a study done by Morningstar, where the difference between Time and Dollar-weighted returns was 3%/year on the S&P 500 open end fund for Vanguard, 1996-2006.
But here’s the result for the S&P 500 Spider, January 1993- September 2011. Time-weighted return: 7.09%/year. Dollar-weighted: 0.01%/yr. Gap: 7%/yr+
Why so much worse than the open-end fund? Easy. Unlike the professional managers at Vanguard, and the relatively long term investors they attract, the retail short term traders of SPY trade badly; they arrive late, and leave late on average.
There is far more analysis to be done here, but to me, this confirms that Jack Bogle was right, and ETFs would be a net harm to retail investors. The freedom to trade harms average investors, and maybe a lot of professionals as well. It may also indicate that short-term trading as practiced by technicians may underperform in aggregate. Not sure about that, but the conclusion is tempting.
One thing I will say: I am certain that profitable trading is not easy. If you are tempted to trade for a living, the answer is probably don’t.
Anyway, here’s my spreadsheet on the topic:
Full disclosure: I have a few clients short SPY, hedged against my long positions.
