An Example of How Performance Chasing Damages Wealth

Yesterday’s post explained the difference between time-weighted returns and dollar-weighted returns. If you read between the lines you’ll have noticed that negative excess returns of dollar-weighted returns over time-weighted returns would indicate a proclivity to performance chase by investors. Some interesting data comes from Russel Kinnel who examined both the time-weighted returns and dollar-weighted returns of various mutual fund categories (US data), through April 2005:

Source: Russel Kinnel from Morningstar, Inc. as cited in “The Fundamental Index” by Robert Arnott.

Related posts:

1. Modified Dietz Return Calculations
2. Time-Weighted vs Dollar-Weighted Returns
3. Dimensional Fund Advisors Part IX