Category: Investments

Emerging Markets During the Financial Crisis

True or False:   During the 2007 financial crisis emerging market funds outperformed U.S. large Cap funds?

Answer:  False:

Evidence:   The chart below compares peak price in 2007 prior to stock market collapse and trough price in 2009 prior to the recovery.   The peak price for VLACX was on October 1, 2007.   The peak price of VWO, the largest emerging market fund, occurred a bit later, on October 22, 2007.   The trough price for both funds was realized on March 2, 2009.

U.S. Large Cap versus Emerging Market During the Financial Crisis
Funds	Peak Before Crash in October 2007	Trough at End of Crash in March 2009	% Decline
VLACX U.S. Large Cap	28.1	12.6	55.3%
VWO Emerging Markets	57.5	19.0	67.0%

The collapse in the Vanguard emerging market fund was larger than the collapse in the Vanguard large-cap U.S. equity market.

Perhaps some other emerging market fund did better but I doubt it.

My blogging ground to a halt the last few weeks because I was completing a paper “Measuring Portfolio Valuation. “  Will put link to paper here shortly.

My new paper looks at two issues.   The first issue involves correct and incorrect ways to measure the PE ratio of a portfolio of stocks.   The second issue involves the correct way to conduct statistical tests on valuation measures for groups of stocks.

The paper starts with a discussion of the limitations of the PE ratio, the most commonly used valuation measure for common stocks.   The PE ratio is undefined when earnings are negative and unstable when earnings are small. By contrast, the ratio of the difference between market cap and earnings to market cap (denoted (MC-E)/MC) has a clear economic meaning when earnings are negative and is not an outlier when earnings are low.  In addition, there is a one-to-one relationship between this ratio and the PE ratio.

Many investment firms use a weighted average of firm PE ratios to measure the PE ratio of their ETFs or mutual funds.   The firms often discard observations from firms with negative earnings and cap the PE ratio of firms with high PE ratios.   These methods are arbitrary and often tend to understate the valuation of stock prices relative to earnings.

The ratio of the sum of market caps of firms in a portfolio to the sum of earnings of firms in the portfolio is the correct way to measure the PE of a portfolio.   This measure of PE can include all firms even firms with negative earnings.  Moreover, small changes in earnings for firm with high PE ratio do not have a large impact on the overall portfolio PE ratio.

A second way to measure the PE ratio of a portfolio, which relies on the weighted average of the statistic ((MC-E)/MC) is presented and shown to be equivalent to the ratio of the sum of market cap to sum of earnings.   This result is motivated in the following blog post.

Two Ways to Calculate a Portfolio PE Ratio:

https://financememos.com/2017/10/11/two-ways-to-calculate-a-portfolio-pe-ratio/

The paper contains a formal proof demonstrating the two methods of constructing a portfolio PE are identical.

Often analysts conduct hypothesis tests on portfolio financial ratios.   Tests based on PE ratios often provide misleading results because of problems measuring the PE ratio when earnings are negative or small.   Firms with negative earnings are routinely omitted from the sample.  The standard deviation and skew of portfolio PE ratios are often large making it difficult to reject a null hypothesis.

By contrast, statistical tests based on (MC-E)/MC do not require the omission of firms with negative earnings.  Moreover, the distribution of (MC-E)/MC appears normally distributed with few outliers.    As a result, statistical tests using this ratio are more reliable than statistical tests using PE ratios.

Two Ways to Calculate a Portfolio PE Ratio 

Question:  The table below contains data on the market cap and the earnings for four high-tech firms.

Market Cap and Earnings for Four Tech Firms
	Market Cap ($ B)	Earnings ($ B)
AAPL	892.16	46.65
MSFT	585.37	21.2
AMZN	475.37	1.92
TWTR	13.11	-0.44797

 

In this post, I am asking you to use two methods to calculate the PE ratio of this four-stock portfolio and to confirm that both methods provide the same answer.

Method One:

Calculate the PE ratio of this portfolio by taking the sum of the market cap numbers for the four stocks and dividing by the sum of the earnings of the four stocks.

Method Two:

Calculate the ratio of (market cap minus earnings) divided by market cap for the four stocks.

Calculate a weighted average of the values (MC-E)/MC for the four stocks with the ratio weighted by MC.  Give the name to this weighted average the letter f.

Calculate 1/(1-f).

Show that the PE ratio from method one is identical to 1/(1-f).

Analysis:

The straight forward way to calculate the PE ratio by taking the ratio of the sum of the market caps to the sum of the earnings is presented below.

Portfolio PE Ratio – Method One
	Market Cap ($ B)	Earnings ($ B)
AAPL	892.16	46.65
MSFT	585.37	21.2
AMZN	475.37	1.92
TWTR	13.11	-0.44797
Total	1966.0	69.3	28.4

 

This four-firm portfolio has a PE ratio of 28.4.

The PE ration calculation for method two  is presented below.

 

Portfolio PE Ratio — Method Two
	Market Cap	Earnings	(MC-E)/MC	Weight
AAPL	892.16	46.65	0.9477	0.4538
MSFT	585.37	21.2	0.9638	0.2977
AMZN	475.37	1.92	0.9960	0.2418
TWTR	13.11	-0.44797	1.0342	0.0067
	1966.01			1.0000
			f	0.9647
			1/(1-f)	28.4

 

The second method for calculating a PE ratio gives the same result as a the first – 28.4.

Implications:   The PE ratio of a portfolio can be expressed as function of the weighted average of the ratio of the difference between market cap and earnings of the firm to market cap of the firm.    This is a very useful result.

PE ratios of firms are frequently not useful.

First, the PE ratio can become very large when earnings are very small. This means it is misleading to look at a weighted average of PE ratios because one firm can have a a very large impact. In our current example, the PE ratio of Amazon is 248 and the weighted average PE ratio for the four stocks is  77.

Second, PE ratios have no economic meaning when earnings are negative.

The PE ratio of a firm with negative earnings would reduce the weighted average of PE ratios in a portfolio.  By contrast, (MC-E)/MC will be larger than 1 if E is less than 0.

A firm with slightly negative earnings would have a negative PE ratio with a larger absolute value than a firm with very large losses.  This ranking of firms is incorrect because larger losses should be associated with lower relative valuations.   By contrast, (MC-E)/MC will always rise when E falls.

By contrast, the ratio of the difference between market cap and earnings over market cap is inversely related to the valuation of a firm.   When earnings are negative this ratio is greater than one.   When earnings are zero the ratio equals one.   When earnings are very small the ratio approaches one and is not an outlier.  The ratio of the difference between the market cap and earnings to market cap is intuitively defined for all earnings and not impacted by outliers.

 

 

How to correctly calculate portfolio PE ratios?

Question:   Two analysts are given the task of calculating the PE ratio of the DOW using the data below.   (Note:  Data on one firm is missing because of a recent merger.)

The first analyst uses method one and takes the ratio of the weighted average of market caps for the 29 companies to the ratio of earnings for the 29 companies.

The second analyst uses method two and takes the weighted average of the PE ratios of the 29 stocks.

What is the correct way to calculate the PE ratio for this portfolio?

What are the ramifications of using the wrong method to calculate the PE ratio for this portfolio?

The Data:

Financial Information on Stocks In The Dow
	Share of Dow	Market Cap ($B)	Trailing Earnings ($B)	Trailing PE
MMM	0.0645	124.9	5.2	23.87
AXP	0.0278	79.8	4.3	18.5
AAPL	0.0474	793.6	45.5	17.44
BA	0.0781	149.7	6.7	22.18
CAT	0.0383	73.7	0.1	696.65
CVX	0.0361	222.6	5.8	38.1
CSCO	0.0103	166.5	9.4	17.7
KO	0.0138	192.0	4.0	47.5
DIS	0.0303	152.1	8.7	17.48
XOM	0.0252	347.4	11.7	29.6
GE	0.0074	209.4	7.1	29.45
GS	0.0729	92.1	7.4	12.44
HD	0.0503	192.8	8.2	23.5
IBM	0.0446	135.2	11.3	12
INTC	0.0117	178.9	12.3	14.5
JNJ	0.0400	348.9	15.9	22
JPM	0.0294	336.1	23.8	14.1
MCD	0.0482	126.9	4.9	25.7
MRK	0.0197	174.6	5.0	34.7
MSFT	0.0229	573.7	20.9	27.5
NKE	0.0159	85.1	4.1	20.7
PFE	0.0110	212.3	8.1	26.1
PG	0.0280	232.0	14.2	16.3
TRV	0.0377	33.8	2.8	12.2
UTX	0.0357	92.7	5.2	17.7
UNH	0.0602	189.4	8.1	23.5
VZ	0.0152	201.9	15.9	12.7
V	0.0323	240.7	6.2	39.1
WMT	0.0240	233.4	12.4	18.8

Methodological Note:  Assume the columns of your spreadsheet are – (1) Share of DOW in A, (2) Market Cap in B, Trailing Earnings in C, and Trailing PE in D.

Also assume there are 29 rows, 1 to 29 for each variable.

The formula for method one is =SUMPRODUCT(a1:a29,b1:b29)/SUMPRODUCT(a1:a29,c1:c29)

The formula for method two is

=SUMPRODUCT(a1:a29,d1:d29)

Analysis:   The DOW PE ratio for method one is 20.5, a pretty high number compared to the historic norm of PE ratios for this index.

The DOW PE ratio for method two is 46.7, a number that is implausible for the portfolio of DOW stocks

Market Cap Weighted Total	203.4
Earings Weighted Total	9.9
Dow PE Ratio Method One	20.5
DOW PE Ratio Method Two	46.7

The PE ratio of one company in the DOW, CAT is 696, an extreme outlier.  This outlier drives up the weighted average of the PE ratios by a lot.

It is inappropriate to take the average of PE ratios because often a PE ratio for a particular company is an outlier or is below zero.

PE ratios below zero are economically meaningless.    For a discussion of how to calculate the PE ratio of a portfolio when some stocks in the portfolio have negative earnings go to the following site.

PE Ratios When Some Firms Have Negative Earnings

http://www.dailymathproblem.com/2017/05/price-earning-ratios-for-portfolios.html

Many analysts deal with the issues of negative or outlier PE ratios by dropping firms from their analysis.     There is no need to drop firms when you calculate a portfolio PE ratio if you are using an appropriate method.

Evaluating Fund Performance

Investment funds, both ETFs and mutual funds, are usually compared on the basis of returns of arbitrarily selected holding periods.   Typically, the fund manager reports year-to-date returns and return for one, three, five, and ten years.  The discussion of fund risk is usually based on a subjective assessment of the risk of the assets in the fund.

The conventional approach to presenting statistics on fund performance is inadequate.   Funds can be purchased at any time, not just a few arbitrarily selected dates.   This post measures the mean and standard deviation of return for two popular funds when there are multiple possible purchase and sale dates for each fund.

Statistical tests are used to evaluate whether the observed difference in return and risk outcomes for two funds are statistically significant.

Question:   This post considers two of Vanguards most successful funds.  VFIAX is a fund that mimics the S&P 500 and VWELX a fund that is around 70% equity and 30% fixed income.

The 48 potential purchase dates for both of the two funds are the first day of each month starting in January 2002 and ending in December of 2005.

The 48 potential sale dates for the two funds are the first day of each month starting in January 2012 and ending in December of 2015.

• Assume that each combination of purchase and sale dates is equally likely.

• What are the expected return and the standard deviation of return for both funds?

• What are the minimum and maximum returns for each fund?

• Can we reject the hypothesis of identical variances for the two funds?

• Can we reject the hypothesis the mean returns are identical?

Analysis:

There are 2304 (48 x 48) possible (purchase-sale) outcomes.  For each of these outcomes I calculate ln(AP₂/AP₁) where AP₂ is the adjusted price in the 2012 to 2015 time period and AP₁ is adjusted price in the 2002 to 2005 time period.

The mean standard deviation, minimum, and maximum for the two funds are presented below.

Returns from Two Funds
	Fund Description	Mean	Standard Deviation	Minimum	Maximum
VWELX	Stocks and bonds	0.763	0.177	0.341	1.14
VFIAX	Stocks	0.692	0.226	0.178	1.21

Sample size 2304 based on 48 possible purchase dates between 2002 and 2005 and 48 possible sale dates 2012 and 2015.

Observations:

• The mean return of the bond/stock fund is higher than the mean return of the stock-only fund by around 10 percent.

• The standard deviation of returns for the bond/stock fund is lower than the standard deviation of returns for the stock-only fund by around 21 percent.

• The maximum return is higher for the stock-only fund by around 92 percent.

• The minimum return is lower for the stock-only fund by around 6 percent.

Comments:

Comment One:  The finding that the combined stock/bond fund has a larger mean return compared to the stock-only fund is extremely unusual because over long periods stocks tend to have higher returns than bonds.    However, the stock portfolios of the two funds differ.  The stock portfolio in VWELX is broadly diversified but does not track a specific index.   The stock portfolio in VFIAX tracks the S&P 500.  VWELX was able to get higher returns than VFIAX because its stock portfolio outperformed the S&P 500 while the bond portfolio lowered risk.   It also did not hurt that interest rates fell and bond prices rose in this time period.

Comment Two:  The stock-only portfolio was much more risky than the combined bond-stock portfolio.   This is evidenced both by the lower standard deviation and the higher minimum return.  The minimum return statistic measures the worst-outcome return.  The worst-outcome return for the combined stock-bond portfolio is around 92 percent higher than the worst-outcome return for the stock-only portfolio.

Tests of equal variances for returns:

A test of the hypothesis that the variances of return for the two portfolios are equal was conducted.   The F-statistic comparing the ratio of the two standard deviations was 1.63, which is significantly different from 1.0.    The hypothesis that the two variances are identical is rejected.

Tests of equal mean returns:

A test of the hypothesis that the mean returns for the two portfolios are equal was conducted.  The t-statistic for this hypothesis test was 12.9.   The hypothesis of identical means is rejected.

Technical Note:  I used STATA to make the calculations in this note.  Period one and period two data were placed in separate data sets.   The N to N merge provides the 2304 outcomes.

Concluding Thought:  The practice of presenting return numbers on investment funds for a few arbitrarily chosen holding periods is, in my view, not very useful.    The holding periods are arbitrary and subject to manipulation.   There is no measure of risk.

The technique presented here relies on many possible outcomes defined by different purchase and sale dates.   The multiple outcome approach allows for the presentation of risk measures.

The note shows that the performance of the VWELX fund was exceptional in this period.

Question:  The table below has price data and daily return data for Vanguard fund VB.   Calculate the arithmetic and geometric averages of the daily return data.   Show that the geometric average accurately reflects the relationship between the initial and final stock price and the arithmetic average does not accurately explain this relationship.

Daily Price and Returns For Vanguard  Fund VB
Date	Adjusted Close	Daily Return
7/1/16	115.480674
7/5/16	113.99773	0.987158509
7/6/16	114.744179	1.006547929
7/7/16	114.913373	1.001474532
7/8/16	117.202487	1.019920345
7/11/16	118.128084	1.007897418
7/12/16	119.451781	1.011205608
7/13/16	119.10344	0.997083836
7/14/16	119.262686	1.001337039
7/15/16	119.402023	1.00116832
7/18/16	119.63093	1.001917112
7/19/16	119.202965	0.996422622
7/20/16	119.959369	1.006345513
7/21/16	119.481646	0.996017627
7/22/16	120.297763	1.00683048
7/25/16	120.019083	0.997683415
7/26/16	120.616248	1.004975584
7/27/16	120.347522	0.997772058
7/28/16	120.536625	1.001571308
7/29/16	120.894921	1.002972507
8/1/16	120.735675	0.998682773
8/2/16	119.12335	0.986645828

Analysis:   The table below presents calculation of the two averages and the count of return days.  The product of the initial value of the ETF, the pertinent average and the count of return days is the estimate of the final value.   Estimates of final ETF value are calculated for both the arithmetic average and the geometric average and these estimates are compared to the actual value of the stock on the final day in the period.

Understanding The Difference Between Arithmetic Mean and Geometric Mean Returns
Statistic	Value	Note
Arithmetic Average of Daily Stock Change Ratio	1.001506208	Average function
Geometric Average of Daily Stock Change Ratio	1.001479966	Geomean function
Count of Return Days	21	Count Function
Estimate of final value based on arithmetic average	119.1889153	Initial Value x Arithmetic Return Average x Count Days
Estimate of final value based on geometric average	119.12335	Initial Value X Geometric Return Average x Count Days
Ending Value	119.12335	Copy from data table

There is another way to show that the daily return should be modeled with the geometric mean rather than arithmetic mean.  The average daily return of the stock is (FV/IV)^(1/n) – 1 where FV is final value and IV is initial value and n is the number of market days in the period, which for this problem is 21.

Using this formula we find the daily average holding period return is 0.001479966.  Note that 1 minus the geometric mean of the daily stock price ratio is also 0.001479966.

The geometric mean gives us the correct holding period return.

Profit and risk when there are four random purchase dates and four random sale dates

Question:   In 2013 a person buys QQQ the high tech ETF) on one of four randomly selected dates determined by when the broker arranges a meeting.   I

The person who bought the QQQ shares in 2014 got fired in 2015.   As soon as the person was fired he realized he needed cash so he called his broker and said “SELL QQQ” The firing is a random event independent of the market and out of control of the person, which occurred on one of four dates.

The four potential purchase and four potential sales dates for the QQQ transactions are presented below.

Information on Potential Purchases and Sales of QQQ
Potential Purchase Date	Purchase Price QQQ	Quantity purchased $25,000/Price	Potential Sale Date	Sale Price
20-May-14	88.0	284.1	5-Jan-15	101.4
7-Jul-14	95.1	262.9	8-Aug-15	110.5
7-Aug-14	94.2	265.4	24-Aug-15	98.5
10-Sep-14	100.1	249.8	5-Nov-15	114.7

The person spends $25,000 on the purchase of QQQ in 2014 and sells all shares in 2015.

Assume no dividends are paid.

What are all possible profit outcomes from the purchase and sale of the QQQ securities?

What is the expected profit?

What is the variance of profit?

Analysis:  The number of share purchased is $25,000 divided by the purchase price; hence the purchase price determines the number of shares purchased.

Tabulation of Number of Shares Purchased
Potential Purchase Date	Purchase Price QQQ	Number of shares purchased
20-May-14	88.0	284.1
7-Jul-14	95.1	262.9
7-Aug-14	94.2	265.4
10-Sep-14	100.1	249.8

Revenue received after the sale is price at time of sale times the number of shares owned.

Profit after the sale is revenue minus the $25,000 initial investment.

There are four possible purchase dates and four possible sale dates.   The purchase and sale dates are independent so there are a total of 16 possible equally likely combinations of sale and purchase dates.   The probability of each purchase/sale combination is 0.0625 (0.25*0.25).

The profit calculation for the 16 purchase-sale combinations is presented in the table below.

Potential Profit Calculation for Four Purchase Dates and Four Sale Dates
Comb #	Probability	Purchase Date	Sale Date	Number of Shares Owned	Sale Price	Profit
1	0.0625	20-May-14	5-Jan-15	284.1	101.4	$3,807
2	0.0625	20-May-14	8-Aug-15	284.1	100.5	$3,552
3	0.0625	20-May-14	24-Aug-15	284.1	98.5	$2,984
4	0.0625	20-May-14	5-Nov-15	284.1	114.7	$7,586
5	0.0625	7-Jul-14	5-Jan-15	262.9	101.4	$1,656
6	0.0625	7-Jul-14	8-Aug-15	262.9	100.5	$1,420
7	0.0625	7-Jul-14	24-Aug-15	262.9	98.5	$894
8	0.0625	7-Jul-14	5-Nov-15	262.9	114.7	$5,152
9	0.0625	7-Aug-14	5-Jan-15	265.4	101.4	$1,911
10	0.0625	7-Aug-14	8-Aug-15	265.4	100.5	$1,672
11	0.0625	7-Aug-14	24-Aug-15	265.4	98.5	$1,141
12	0.0625	7-Aug-14	5-Nov-15	265.4	114.7	$5,441
13	0.0625	10-Sep-14	5-Jan-15	249.8	101.4	$325
14	0.0625	10-Sep-14	8-Aug-15	249.8	100.5	$100
15	0.0625	10-Sep-14	24-Aug-15	249.8	98.5	-$400
16	0.0625	10-Sep-14	5-Nov-15	249.8	114.7	$3,646
					Min	-$400
					Max	$7,586
					Range	$7,986

The minimum profit is -$400.   The maximum profit is $7,985.

The expected profit is obtained by taking the dot product or the sumproduct of the probability vector with the profit vector.   The variance was obtained from the computational formula.

Var (Profit) = E(profit²) – E(Profit)²

For a discussion of these calculations see the previous post.

http://dailymathproblem.blogspot.com/2015/11/expected-value-and-variance-of-share.html

The expected value and variance or profit from the purchase of QQQ on one of four dates in 2014 and the sale of QQQ on one of four dates in 2015 are presented below.

Expected Profit and Variance of Profit Calculations
E(PROFIT)	2555.4
E(PROFIT2)	11036765.0
E(PROFIT2)-E(PROFIT)2	4506556.2
E(PROFIT-E(PROFIT))2	4506556.2

Financial Discussion:

The purchaser of QQQ or any stock that buys randomly and is forced to sell because of random events unrelated to the market bears substantial risk compared to an investor with enough liquid assets who will not need to sell in an emergency.   Investors would be wise to consider the level of the market and their ability to hold through downturns prior to selling.  The experts say that stock market returns beat returns on other securities over the long haul.  But this investor was only able to hold for a year.

Outcomes could have been worse.   The broker put the investor in QQQ a relatively diversified ETF that focuses on tech stocks.  Had the broker put his client in one particular stock (say IBM) and the investor was forced to sell he would have realized a large loss.

Measuring Returns for Different Investment-Consumption Patterns

Question:   An investment advisor tells his client to invest $1,000 per month in VFIAX (Vanguard S&P fund) for five years.   The person will then live off the proceeds in this fund for 36 consecutive months.

Calculate the return on assets from this investment/consumption plan for two different start dates – January 1, 2002 and January 1, 2003.

What is the NPV of investment returns from this investment strategy/ consumption plan on the same start dates?

What should investors who are planning to save for five years and spend for three years learn from this example?

Mutual funds and ETFs tend to advertise holding period returns based on specific purchase dates and specific sale dates.   These returns are based on the price of securities on two dates only.   What does the example presented here tell you about the usefulness of two-period return statistics reported by mutual funds?

Methodological Note:  The shares purchased each month are $1,000/PVFIAX where PVFIAX is the price of the ETF.   I sum over 60 months to get the total shares purchased, which I will denote TSHARES. The formula for cash inflow for the 36 months are (1/36)*TSHARE*PVFIAX.

The cash inflow/outflow column and the date column are inputted into the XIRR function in Excel to give the IRR of the inflows/outflows on these particular dates. The XNPV function gives net present value of the cash flows.

Analysis:

The value of VFIAX reached its pre financial crisis high in 10/2007 and reached its crisis trough in 02/2009.   Hindsight is 20/20 but it appears as though diversification prior to the downturn would have been beneficial.

What follows are return calculations for the two scenarios.

Results are in the table below.

Returns for Two Investment/Consumption Scenarios
Invest Period	Consumption Period	IRR	NPV
2002/2006	2007/2009	12.04	$15,766
2003/2007	2008/2010	2.98*e-9	$801

Observations:

• The person who stopped saving in December 2006 did fairly well despite the financial crisis.The IRR for this investor was 12.04 %.   The NPV of the investments was $15,766.   (NPV calculation assumes a5 percent cost of capital.) 

• The person who stopped investing in December 2007 realized a return only slightly higher than 0 percent.The NPV of this person’s investment was around $800.

Discussion of Investment Strategy:

In my view, a 100 percent VFIAX strategy is unwise for an investor with this type of investment and consumption period.

How to fix this problem is a more difficult question.  It is important to note that the strategy of putting 100 percent of funds in VFIA for an investor with a start date of January 1 2009 or January 1, 2010 did quite well.

529 plans offer life-cycle funds that drift towards a more conservative investment as the person nears the date where he must spend money.   Lifecycle funds would have done reasonably well for both of the scenarios considered here.  However, the life-cycle approach creates miserable results when the market does poorly in the first few years of the investment period and then rebounds.

My view on how to solve this problem is evolving.  A 60/40 (stock/bond) portfolio would have done well in these time periods but I don’t believe that it will work in the next crash.  Interest rates are now very low and I expect in the next crisis bonds and stocks will crash together.   Perhaps allocating some resources into an inflation-indexed bond fund would help balance returns during the next crisis.

The trend in investment is toward investment in passively managed funds like the ones offered by Vanguard.    This is at best a partial solution.   Investors need help in allocating money across several passively managed funds.  This includes advice on initial allocations and reallocation over time.

I believe there is a need for an actively managed fund that invests exclusively in passively managed funds and reallocated assets across funds as market conditions change.

Note on traditional holding period statistics:  The value of VFIAX in January 2002 was 17.9.  In December of 2010 the value of VFIAX was 39.5.   The return for this 7.9 year  holding period was at 10.5%.

Holding Period Calculation
Jan-03	17.9
Dec-10	39.5
Holding Period in Years	7.92
ROR	10.5%

However a person who started investing in January 2003 and started spending in January 2008 earned squat!   

The mutual funds can legally and honestly report great eight-year or ten-year holding return but their clients aren’t doing particularly well.

Such a surprise!