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Fund returns versus investor returns

Why the return a fund reports is not the return its investors actually get, and how timing opens the gap.

FinanceBogle ch. 5About 6 min: 4 reading, 2 practiceUpdated

General education, not financial advice.

After this lesson you can
  • Tell a fund's time-weighted return from its investors' dollar-weighted return
  • Show with numbers how buying after good years and selling after bad ones widens the gap
  • Read current estimates of the gap critically

Builds toward: Invest on your own. Understand low-cost funds, read a fund factsheet, and spot a sales pitch.

Common-sense investing: the case for index funds: lesson 4 of 12
  1. Costs and the market
  2. Investors as a group earn the market minus costs 7 min
  3. Bogle ch. 2
  4. Where stock returns come from 5 min
  5. Bogle ch. 3
  6. Owning the whole market 4 min
  7. Bogle ch. 5
  8. Fund returns versus investor returns 6 min
  9. Bogle ch. 6
  10. Taxes are costs too 5 min
  11. Bogle ch. 7
  12. When future returns are lower 5 min
  13. Bogle ch. 8–9
  14. Why past winners rarely repeat 5 min
  15. Costs and the market
  16. Is advice worth paying for? 7 min
  17. Bogle ch. 11–12
  18. Costs go on forever 5 min
  19. Bogle ch. 13
  20. Bonds and money-market funds 4 min
  21. Bogle ch. 14–15
  22. New indexes and ETFs 5 min
  23. Bogle ch. 16–18
  24. Graham, the arithmetic, and a plan 5 min

Try first

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Pairs with Bogle, The Little Book of Common Sense Investing (2007), chapter 5, "The Grand Illusion"

What it is

A fund reports its time-weighted return: how much one share grew, with dividends reinvested, as if you had put money in at the start and never touched it.

But real investors add and withdraw money at different times. What they actually earn is the dollar-weighted return (also called the investor return), which counts how much money was in the fund when the gains and losses happened.

If money pours in after a fund has done well and flows out after it has done badly, most of the money is there for the bad years. Then investors as a group earn less than the fund itself reports. Bogle calls the idea that investors earn their funds' reported returns a "grand illusion".

Quick check

Tap an answer to check it.

  1. A fund gained 30%, then lost 20%. Investors added most of their money just before the loss. Compared with the fund's reported return, the investors' own return was …

    Show answer

    lower. The dollar-weighted return gives more weight to the year when more money was invested.

Why it matters

In Bogle's figures for 1980–2005, the average stock fund returned 10.0% a year, but the average investor in those funds earned about 7.3%, a gap of 2.7 points a year, on top of the costs in the previous lesson. He blames two things: buying at the wrong time (heavy buying near the 1999–2000 peak) and buying the wrong funds (the most aggressive ones). He is open that his estimate is rough: in his words, the point is direction, not precision.

Worked example

Two investors each put 1,000 into the same fund. The fund gains 30% in year 1 and loses 20% in year 2.

  • The fund's own return: 1.30 × 0.80 = 1.04 over two years, about +1.98% a year.
  • Investor A holds: 1,000 → 1,300 → 1,040.
  • Investor B, impressed by year 1, adds another 1,000: 1,300 + 1,000 = 2,300 → 2,300 × 0.80 = 1,840. B put in 2,000 and ends with 1,840: a loss.
  • B's dollar-weighted return solves 1,000 × (1 + x)² + 1,000 × (1 + x) = 1,840, which gives x ≈ −5.43% a year.

Same fund, same years: A earned the fund's +1.98%, B lost about 5.4% a year, purely because of when the money went in.

Two investors, one fund

Drag a slider and watch the result change.

For learning only. Real accounts have fees, taxes and changing rates.

Common mistake

Assuming you earned the return in a fund's advert or fact sheet. That figure is for money that stayed put the whole time. If you added or withdrew money along the way, your own return can be quite different. Some brokers and fund companies show a personal (dollar-weighted) return on statements.

Key terms

time-weighted return
the fund's return per share, as if no money came in or went out
dollar-weighted return
the return on the money investors actually had in, given when they added and withdrew it
investor return
another name for the dollar-weighted return of a fund's investors as a group
performance chasing
buying what has recently done well

Practise the key terms

Tap a card to turn it over. 4 cards.

FrontBack
time-weighted returnthe fund's return per share, as if no money came in or went out
dollar-weighted returnthe return on the money investors actually had in, given when they added and withdrew it
investor returnanother name for the dollar-weighted return of a fund's investors as a group
performance chasingbuying what has recently done well

Practice

Try it: make year 1 the bad year and year 2 the good one, and watch investor B come out ahead. Then set B's extra money to 0.

Quick quiz

Tap an answer to check it.

  1. Which return does a fund report in its fact sheet?

    Show answer

    time-weighted. Funds report the return per share over time.

  2. In the worked example, why does investor B lose money in a fund that rose over the two years?

    Show answer

    Most of B's money was invested in the year the fund fell. Dollar-weighted returns weigh each year by the money invested in it.

Sort it

Does this tend to widen or narrow the gap between fund return and investor return?

  1. Buying a fund after a year of big gains

    Show answer

    Widens the gap. More money is in the fund for what comes next, which may be a weaker year.

  2. Selling after a crash

    Show answer

    Widens the gap. Money leaves before the recovery.

  3. Investing the same amount every month and holding

    Show answer

    Narrows the gap. No chasing; timing plays a small part.

  4. Switching to last year's top fund

    Show answer

    Widens the gap. Performance chasing.

The other view

How big is the gap today? Morningstar's yearly Mind the Gap study reports that over the 10 years ended 31 December 2025, the average dollar in the U.S. funds and ETFs it studied earned 8.7% a year, against 9.9% for the funds themselves: a gap of about 1.2 points a year, smaller than Bogle's 2.7.

But the size of the gap is debated. A 2026 paper in the Financial Analysts Journal (Fulkerson, Jordan, Riley and Yan) re-analysed Morningstar's earlier sample and argues that, using the same sample, bad timing cost investors only about 0.10% a year. What both sides agree on: the dollar-weighted return can differ from the fund's return, and chasing recent winners doesn't help.

Last checked: 27 October 2026.

In short

  • Funds report time-weighted returns; investors earn dollar-weighted returns.
  • Money arriving after good years and leaving after bad ones makes investor returns lag.
  • Bogle's 1980–2005 estimate: about 2.7 points a year.
  • Recent estimates are smaller (Morningstar: about 1.2), and some researchers argue the true timing cost is much smaller still.

Mastery check

Answer without looking back. Score 80% or more and the lesson is marked done. Your result is kept only in this browser.

Check yourself

Answer in your head first, then open the answer. Nothing is saved.

  1. What does a dollar-weighted return take into account that a time-weighted return ignores?

    Show answer

    When money was added to or taken out of the fund, and how much.

  2. In the worked example, what did investor A earn per year?

    Show answer

    About 1.98%, the same as the fund, because A never added or withdrew money.

  3. Name the two investor mistakes Bogle blames for the gap.

    Show answer

    Bad timing (buying near peaks) and bad selection (choosing the hottest, riskiest funds).

Further reading