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Figure 1-6 is a compilation of 22 data points from 15 similar studies that sought to determine the success of the average investor at capturing mutual fund or benchmark portfolio returns. The studies include investors who were following or not following the advice of a passive advisor. Since they leave intuition and forecasting out of their decision making process, passive advisors are often referred to as evidence-based advisors. Within Figure 1-6, the blue bars indicate that the average mutual fund investor, without the advice of a passive advisor, captured only an average of 50% of fund returns. The purple bars represent investors who invested in index funds, but did not follow the advice of a passive advisor. On average, they captured 80% of the returns of various index funds. Possible explanations might include the failure to rebalance asset allocations during market turbulence, the delay of investing when cash is available, the inability to stay invested during rocky markets, or the failure to heed the ongoing advice of their passive advisor. The green bars reveal the results of three time periods that looked at the success of index fund investors who have been identified as following the advice of their passive advisors. One study was conducted by my own firm, IFA, and the other by Morningstar in the 2005 Morningstar Indexes Yearbook. These three data points show that individuals who invested in Dimensional Fund Advisors’ funds and used passive advisors captured, on average, all of the fund returns and even a bit more — 101% of the fund returns 17.

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

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