Before Index Funds: How Much of the Market Return Could Investors Have Got?

Abstract

This paper constructs new indexes of mutual fund returns from 1926 and compares the returns investors could have realized to published market returns. The stock fund investor would have underperformed by 120 - 158 bp annualized. The balanced fund investor would have lagged in the 1930s and 1960s. To show the impact of including costs, the new fund indexes are applied to re-examine sustainable withdrawal rates. Contrary to prior work using cost-free indexes, a 1960s US retiree invested in mutual funds could not have sustained a 4% withdrawal rate. The more complete the cost accounting the greater the shortfall.

Keywords: mutual fund performance, sustainable withdrawal rate, cost matters hypothesis, 60/40 allocation

JEL Classification: G23, G51