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Measuring Gaps Between Hypothetical Investment Returns and Actual Investor Returns

14 Pages Posted: 23 Sep 2014  

James Ming Chen

Michigan State University - College of Law

Date Written: September 23, 2014

Abstract

Actual investor returns from mutual funds lag behind hypothetical returns based on a fixed initial investment and reinvestment of all distributions. This gap arises from behaviorally driven errors in timing. The nonproprietary literature on this performance gap has emphasized the relationship of this gap to overall returns on stocks and mutual funds. This article seeks to address more directly the relationship of behaviorally driven gaps in investment returns to downside risk, upside gain, and overall volatility. Documenting the existence of this gap across the universe of publicly traded securities — not only in the aggregate, but also on a security-by-security basis — may provide a legal basis for requiring mutual fund and exchange-traded fund managers to compute and disclose that gap.

Suggested Citation

Chen, James Ming, Measuring Gaps Between Hypothetical Investment Returns and Actual Investor Returns (September 23, 2014). Available at SSRN: https://ssrn.com/abstract=2500079 or http://dx.doi.org/10.2139/ssrn.2500079

James Ming Chen (Contact Author)

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

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