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Garbage in garbage out. M* didn't calculate any actual investor returns, it effectively calculated the returns of a hypothetical investor who had the same monthly buy and sell behavior as the ner fund inflows and outflows for each month and said that is the returns of an average investor.
Not a single investor would have realized such a return let alone an average investor. Moreover, the net inflows and outflows include perfectly reasonable transactions of DCAing in or fixed withdrawals amongst all other reasons for the flows to claim this is all because of performance chasing.
People take the M* claim as gospel and further embellish the false conclusions especially when it serves a predisposed view.
>> returns of a hypothetical investor who had the same monthly buy and sell behavior as the ner fund inflows and outflows for each month and said that is the returns of an average investor. >> Not a single investor would have realized such a return let alone an average investor. Moreover, the net inflows and outflows include perfectly reasonable transactions of DCAing in or fixed withdrawals amongst all other reasons for the flows to claim this is all because of performance chasing.
I thought this method was clever. What proportion do you think is not representative of performance-chasing ? Not trying to pin you down to some theory, just an interesting question, seems to me, and an interesting analytic problem. You of course sound certain: 'not a single investor', etc.
I find fault regularly w/ M*, but they sure do have a lot of smart data-crunchers at work, seems to me.
What proportion do you think is not representative of performance-chasing ?
Problem is that the methodology used has zero information about the reasons for and distribution of the flows between different reasons for the flows in or out. It is a net composite of ALL monthly flows in and out. This will vary from fund to fund and won't repeat the same way in any time period. So there is no way to compute how much of that computation is attributable to performance chasing which will vary from month to month. For example, a huge inflow may just be due to the fund being newly included in a 401k plan or getting included in an advisor platform or any number of reasons.
The reason no one will realize those returns is because no one trades like the composite each month.
The problem with using the composite is easy to illustrate with a small boundary case example.
Consider a hypothetical fund with just two investors in it. One DCAs in $X every month and the other withdraws $X every month. The M* computation would see no net flow in or out and say the average investor realizes the full returns of the fund because the average investor is a buy and hold investor.
But neither of those two investors fit that composite and both realize different gains depending on how the fund returns were distributed through the year. Either could have a better return than the other depending on the market behavior (for example most of the gains at the beginning of the year vs most gains at the end of the year).
This is a similar problem as the fallacy of averages. The average of expected value computations on a sequence of inputs is not equal to the expected value computation of the average of the inputs.
M* is good at collecting and tabulating data, terrible at computation and even worse in interpretation.
Comments
Not a single investor would have realized such a return let alone an average investor. Moreover, the net inflows and outflows include perfectly reasonable transactions of DCAing in or fixed withdrawals amongst all other reasons for the flows to claim this is all because of performance chasing.
People take the M* claim as gospel and further embellish the false conclusions especially when it serves a predisposed view.
>> Not a single investor would have realized such a return let alone an average investor. Moreover, the net inflows and outflows include perfectly reasonable transactions of DCAing in or fixed withdrawals amongst all other reasons for the flows to claim this is all because of performance chasing.
I thought this method was clever. What proportion do you think is not representative of performance-chasing ? Not trying to pin you down to some theory, just an interesting question, seems to me, and an interesting analytic problem. You of course sound certain: 'not a single investor', etc.
I find fault regularly w/ M*, but they sure do have a lot of smart data-crunchers at work, seems to me.
The reason no one will realize those returns is because no one trades like the composite each month.
The problem with using the composite is easy to illustrate with a small boundary case example.
Consider a hypothetical fund with just two investors in it. One DCAs in $X every month and the other withdraws $X every month. The M* computation would see no net flow in or out and say the average investor realizes the full returns of the fund because the average investor is a buy and hold investor.
But neither of those two investors fit that composite and both realize different gains depending on how the fund returns were distributed through the year. Either could have a better return than the other depending on the market behavior (for example most of the gains at the beginning of the year vs most gains at the end of the year).
This is a similar problem as the fallacy of averages. The average of expected value computations on a sequence of inputs is not equal to the expected value computation of the average of the inputs.
M* is good at collecting and tabulating data, terrible at computation and even worse in interpretation.