Morningstar Investor Returns: Another Reason Why Chasing Past Performance Is Bad

Traditionally, when you look at the historical return of mutual funds, you are getting what is called a time-weighted return. For example, the 5-year return is what you would have gotten if you bought the fund five years ago and held it continuously until today, all the while reinvesting dividends.

Last year, Morningstar rolled out what it terms the Morningstar Investor Return, otherwise known as a dollar-weighted return. This measures the returns that investors actually achieved in that fund, based on dollar inflows and outflows. It’s actually pretty interesting: If investors as a whole timed their purchases correctly and bought more shares when the fund was low, then their returns would actually be higher than the time-weighted returns. If, instead, investors waited until the fund performed well before buying in, and then sold their shares when the price was lagging, then their dollar-weighted returns would be lower than the time-weighted return. Guess which one happens almost all the time?

To find these numbers, go to Morningstar and type in any symbol in the quote box. Let’s take my very first mutual fund purchase, Janus Mercury (now Janus Research), symbol JAMRX. Then click on Total Returns, and then finally on the Investor Returns tab on the top. You should find this:


Yikes. If you take the 10-year historical return, which includes both the big Tech bubble and crash, instead of the happy 10% annual return number most people see, the average investor actually lost 2% annually during this period. They tried to time it, and lost tons of money in the process. (I was one of them.)

Now, don’t think this performance chasing doesn’t apply to index funds. It does. Check out the Investor Returns for the classic Vanguard S&P 500 Index Fund, VFINX:


Not quite as bad, but the average owner still lagged the fund’s performance by over 1% a year. What do we learn from seeing these Investor Returns?

Making a decision on which mutual fund to buy based on past performance is simply not a good idea. What happens when the performance starts to lag? Since you’re making decisions based on past performance, then you’re probably going to find another fund that’s been doing well recently, and then jump on that ship instead. It’s just a never-ending cycle of losing money.

This is why when I am looking at mutual funds to purchase, I completely ignore recent performance. I couldn’t tell you the recent returns of any of my fund holdings. The things I do look at are – the asset class and what index it follows, the expense ratio, and the tax efficiency. Maybe the fund minimums too, but that’s it.

(I also ignore the Morningstar Star rating system as I think it’s pretty useless as well, but that’s another post.)

2. Volatility matters. Buy-and-hold works… if you hold! You keep hearing that people shouldn’t own too much in stocks if they can’t tolerate the risk. You can see why by viewing the Investor Returns on the more volatile funds. They stink! According to this CBS MarketWatch article, the funds with the greatest relative volatilities had dollar weighted returns of just 62% of time-weighted returns.

When people see ups and downs on the Great Stock Market Ride, as a whole they are horrible at timing when to get on and when to get off. When (not if, when!) the market crashes again, people who aren’t prepared will panic and get off the ride. But when will they get back on? The result is lost money.

Here, the lesson is that even if you do plan on sticking with index funds, you must remind yourself during the rough patches that staying the course will be most profitable in the end.


  1. Very Interesting.

    My question is, how does this information help you in deciding WHICH fund to buy? It seems to definitely indicate “buy low and hold on” works, but as to the specific fund you are looking at, it seems only to say: people haven’t done so on this fund. How does other’s failure to ‘time it right’ change what the fund actually did or will do?

    Also, you mention “when the market crashes again”…and “people who aren’t prepared”. How should I prepare myself for a crash? Just say to myself, “I will not sell, I will not sell, I will not sell”? What is your strategy?

    Great article, thanks for digging up this tidbit– can’t get enough of your thoughts.

  2. It just seems like when picking mutual funds for your 401K, there is no real good or easy way to figure out which funds to chose. This is assuming you don’t pick all index funds, which most people don’t as there may not be good small & mid cap or international index funds available.

    The criteria you selected are helpful, but for a non-index fund you need more information. You need to know how “good” the fund’s managers are. I would argue that while not perfect, long term performance information is one relevant factor that should be considered in that calculus.

  3. This metric you outlined is an interesting way to “quantify” people’s actual risk tolerance for more volatile investments. Another reason to use the Morningstar site. I currently use the instant x-ray tool (free) for my asset allocation; it seems to have more accurate info on the funds I own in various 401ks etc. than the Portfolio tools at Schwab or Fidelity.

  4. Thanks for making us aware of Morningstar’s Investor Return data. Certainly provides food for thought. I checked a few of my funds and found an interesting statistic: the Investor Return for Dodge & Cox Stock Fund (DODGX) exceeds the total return for the past 1, 3, 5, and 10 year periods. I guess this suggests that the fund holders are better market timers than the fund managers?

  5. Thanks for sharing this little tidbit about morningstar…I had not noticed it before…excellent.

    I’m not sure I completely agree with your assessment about not buying on past performance. If the manager of the fund has been there for a long period and have done well relatively to the market, I will tend to give some credence to their ability to manage the fund well. I noticed you went on to cite “recent performance”…that logic is more appealing to me (and maybe what you intended in the first place). If the track record is short, then I agree, you should be very cautious about how much weight you give it.

    I also agree with the other stats you mention such as volatility, expenses, etc. I also tend to favor lower P/Es among similar type funds.

    At any rate, your point about “chasing performance” is well taken. Thanks for the post.

  6. Ted Valentine says:

    Interesting. I’ve always thought the average annual return numbers were very misleading and confusing. For example, say you invest in an aggressive fund you read about that has been kicking butt. Soon after you invest the market suddenly turns on some bad news and you lose 20%. That fund’s NAV would have to increase by 25% just to get you back even.

  7. enonymous says:

    Great find on this one. I think we all know the buy and hold adage, and we all have heard that past performance is just that and nothing more. but to see the acutal impact of chasing past performance in black and white – it’s quite eye-opening. In fact, although vanguard’s index 500 fund showed some difference between annualized investor and annualized total returns, the discrepancy was smaller – likely because people don’t chase this fund nearly as often as they chase the ‘top fund picks.’
    But there is another side to the story. Take a look at FCNTX – fidelity’s venerable Contrafund (i think it is now closed to new investors in the past year or so). Contrafund is the magellan of our time, with returns over the past 10 years that have beat the S&P 500 fairly handily (12% vs 8% roughly speaking). The 10 year annualized INVESTOR returns are 12.11% compared to the TOTAL returns of 11.34%. It is a matter of speculation to guess why this might be the case – my feeling is that this fund has a long track record of consistent returns, and as such, does not tend to get the ‘jump on the bandwagon’ influx that other hot funds may get.
    Now, is there a way to search for/by the best “Investor Return % Rank in Category?” I think that would be a more interesting way to use the morningstar data.

  8. CFO – Looking at past returns won’t help you choose which fund to buy. How to pick a fund is a tricky thing to talk about, as there are multiple views people have, and nobody knows who’d going be right for sure (although many people are very confident in themselves.) They way I see it, you’ll need reasons that are based on the long term returns of business, and not able to be swayed by the talking heads on CNBC.

    For now, this is kind of how not to invest.

    I’ve thought about that too. But even “good” mutual fund managers leave, retire, or go sour. What happens then? How do you decide when to bail? Take Berkshire, what if Buffett leaves and they have 2 bad years. Do you stick around? What about Legg Mason and Bill Miller? How many lagging years will he get after this one? I can see why people use them as a criteria, but it just seems to be a tiring method of investing to me personally. Add in the effects of asset bloat, and I’m just not interested.

    Check out the charts of FCNTX and DODGX. It just goes up and up, especially compared to the index. There has been no reason for investors to jump ship – yet 🙂 There are definitely funds where investor return is higher than time-weighted. But they are the minority, and it’s usually not by as much as others lag.

    The question is, do you think this will be the case for the next 30 years? If not, how do you know when to get out? Are you willing to bet your own money on it? I don’t know the answers to these questions, it may very well work out great. DODGX and FCNTX may become the best mutual funds in history. My point is just that I feel the odds of such a thing happening are against us, and I like to play with the best odds whenever possible.

  9. I’ve seen financial planners using only fundamental ratios as a criteria for recomanding mutual funds. They are: Alpha (tells you how good is that fund manger compared with others in the same category);
    Sharpe coeficient ; Taylor coeficient; Jansen coeficient; rank in category and of course the correlation coeficient.

    There was no direct note about past performance in their selection. Sure, the above parameters incorporate that to some degree.

    My opinion: find your tolerated asset allocation and buy index funds to modelate that. Vanguard family seems to have be the cheapest ones, but Fidelity has also some good ones.


  10. What is interesting, is that with target retirement plans, this might actually lean the opposite way… They essentially rebalance on a daily basis always buying what is low and selling high. (If Europe gets ahead, the target fund puts new allocations into what is behind. Say the U.S…) I’m thinking that for someone in a target fund, the “investor return” might actually be better than the total return.

    Target retirement funds automatically do what typical investor psychology won’t let us, as is evidenced by the data you’ve shown.

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