Let’s say you round up a bunch of index fund investors.  Like a shepherd with a nipping Border Collie, you coral them into a gated pen. Next, you corner investors in actively managed funds.  They’re a different breed.  So you don’t want to mix them. 

 “Why do you invest in index funds?” you ask the first shaking lot.  A spokesperson steps forward.  “Costs are low,” she says.  “And we don’t believe people can pick winning funds ahead of time.”

You step over to the other pen.  “Why do you buy actively managed funds?” you ask.  This group impresses you.  They seem more confident.  But their answers vary.  “Our advisors tell us which funds to buy and when,” some shout.  Others yell, “We have the skill to choose great managers!”

Investors in actively managed funds might be more confident than index fund investors.  But are they as smart?  By “smart” I’m asking if they can harness their emotions. 

We all utter the mantra, buy low, sell high.  But in reality, most of us fail to act on it. We feel better when markets rise.  So we add more money.  When markets drop, we hide our heads when we should invest more. As a result, too many people buy high and sell low.

I studied two actively managed mutual fund companies:  American Funds and Fidelity.  I then compared them with Vanguard’s index funds.  Using the Morningstar database, I wanted to see which set of investors showed more discipline:  the active fund investors or the index investors.  Morningstar gives us the gauge.  

For example, Fidelity’s Emerging Market Asia fund is actively managed.  During the 10 years ending October 31, 2014, it averaged 11.45 percent per year after fees.  But according to Morningstar, its investors earned a paltry 4.02 percent.  If Morningstar’s data is correct, most of the fund’s investors were knuckleheads.  When the fund rose in value, they bought.  When the fund price fell, they sold or ceased to buy.  Such backward behavior kills investment returns.

In September 2014, James O’Shaughnessy told Business Insider of a Fidelity study.  The mutual fund company wanted to learn which of its investors performed best.  Were they tracking Morningstar ratings?  Were they following the economy or their advisors’ fund selections?  No.  The investors with the best results were the ones who forgot they even had an account with Fidelity!

Index fund investors, it appears, are either emotionally smarter—or asleep.  More of them seem to dollar cost average, investing equal sums each month.  Or they buy and hold, instead of jumping in and out.  As a result, index fund investors get closer to matching the returns of the funds they buy.

The American Funds family is an interesting case.  You can’t buy their funds without an advisor.  So I expected their investors to excel. Their advisors, I thought, might harness their emotions. On the other hand, I thought Fidelity’s investors would have mixed results.  Fidelity is a favorite with both financial advisors and DIY investors. Vanguard’s index funds, in contrast, are mostly the domain of do-it-yourself investors.  I thought the solo artists in Vanguard’s indexes might do worse.  But I was wrong.

When measuring U.S. Large Cap funds with 10-year returns, investors in the American Funds underperformed their investments by 1.37 percent each year.  Fidelity’s investors underperformed their funds by 2.39 percent. Those in Vanguard’s indexes stuck closest to the wire.  They underperformed by 1.35 percent. The race between American Funds and Vanguard was close. So I then checked investors in emerging market funds.

Those in the American Funds Emerging Market product underperformed their investment by 3.34 percent per year.  Fidelity’s investors did horribly.  They underperformed their funds by 6.61 percent.  Once again, the Vanguard investors were the most disciplined.  They came up just 0.78 percent short of their Emerging Market benchmark. 

Next, I checked the broad international equity category.  Morningstar didn’t provide investors’ 10-year results for the sole American Funds contender, the International Growth and Income Fund.  But its 5-year results were published.  Investors underperformed their fund by 0.91 percent.  Vanguard’s investors did better.  They actually outperformed Vanguard’s International Stock Market Index by 1.1 percent.  This means they invested more when prices were low and less when prices were high.  Dollar cost averaging could have done the trick.

Fidelity has five broad international stock market funds with ten-year track records.  Its investors underperformed their funds by 1.91 percent per year.  Vanguard’s investors outperformed again, beating their international index by 0.1 percent.

Fortunately Fidelity’s investors can save a bit of face in the small cap equity category. They outperformed their funds with ten-year track records by 0.76 percent per year. The American Funds Small Cap investors couldn’t keep pace. They fell short by 1.41 percent.  Vanguard’s investors missed their mark by just 0.81 percent.

Index fund investors?  Yeah, they’re frugal.  We know, because they buy the lowest cost funds. But are they also the smartest, as defined by discipline? According to Morningstar, they certainly could be.

Investors’ Behavior

American Funds vs. Vanguard

U.S. Large Cap

  10 Year Fund Return 10 Year Investor Return
American Funds AMCAP A (AMCPX) +8.77% +7.48%
American Funds Growth Fund of America (AGTHX) +8.75% +7.06%
American Funds American Mutual A (AMRMX) +8.15% +7.24%
American Funds Fundamental Investors A (ANCFX) +9.28% +7.78%
American Funds Washington Mutual A (AWSHX) +7.78% +6.31%
 
Vanguard S&P 500 Index Fund (VFINX) +8.08% +6.34%
Vanguard Total Stock Market Index Fund (VTSMX) +8.61% +9.33%
Vanguard Growth Index Fund (VIGRX) +9.1% +7.09%
Vanguard Value Index (VIVAX) +7.73% +5.36%

U.S. Large Cap Category Average

  10 Year Fund Return 10 Year Investor Return Investors’ Underperformance/Over-performance
American Funds Category Average +8.54% +7.17% -1.37%
Vanguard Index Funds Category Average +8.38% +7.03% -1.35%

Emerging Market Equity

  10 Year Fund Return 10 Year Investor Return
American Funds New World A (NEWFX) +10.11% +6.77%
 
Vanguard Emerging Markets Index (VEIEX) +10.24 +9.46

Emerging Market Category Average

  10 Year Fund Return 10 Year Investor Return Investors’ Underperformance/Over-performance
American Funds +10.11% +6.77% -3.34%
Vanguard +10.24% +9.46% -0.78%

Broad International Equity

  5 Year Fund Returns 5 Year Investor Returns*
American Funds International Growth & Income Fund (IGAAX) +8.26% +7.35%
 
Vanguard Total International Stock Index +6.28% +6.38%

Broad International Equity Category Average

  5 Year Fund Returns 5 Year Investor Returns* Investors’ Underperformance/Over-performance
American Funds +7.35%   -0.91%
Vanguard +6.28%   +1.10%

Small Cap Equity

  10 Year Fund Returns 10 Year Investor Returns
American Funds Small Cap World A (SMCWX) +9.41% +8.0%
 
Vanguard Small Cap Index (NAESX) +9.94% +9.13%

Small Cap Equity Category

  10 Year Fund Returns 10 Year Investor Returns Investors’ Underperformance/Over-performance
American Funds +9.41% +8.0% -1.41%
Vanguard +9.94% +9.13% -0.81%

Investors’ Behavior

Fidelity vs. Vanguard

U.S. Large Cap

  10 Year Fund Return 10 Year Investor Return
Fidelity Large Cap Stock (FLCSX) +9.6% +9.38%
Fidelity Growth & Income (FGRIX) +4.07% +1.59%
Fidelity Mega Cap Stock (FGRTX) +8.56% +9.71%
Fidelity OTC Portfolio (FOCPX) +12.5% +10.77%
Fidelity Independence (FDFFX) +10.08% +6.85%
Fidelity Magellan (FMAGX) +6.22% +3.55%
Fidelity Disciplined Equity (FDEQX) +7.24% +1.34%
Fidelity Value Discovery (FVDFX) +9.09% +2.69%
Fidelity Growth Discovery (FDSVX) +9.16% +1.81%
Fidelity New Millenium (FMILX) +10.69% +10.58%
Fidelity Trend (FDGFX) +10.12% +9.7%
Fidelity Dividend Growth (FDGFX) +7.74% +5.65%
Fidelity Focus Stock (FTQGX) +11.05% +12.8%
Fidelity Blue Chip Value (FBCVX) +5.61% +0.46%
Fidelity Equity Dividend Income (FEQTX) +5.93% +4.04%
Fidelity Contrafund (FCNTX) +10.35% +8.84%
 
Vanguard S&P 500 Index Fund (VFINX) +8.08% +6.34%
Vanguard Growth Index Fund (VIGRX) +9.1% +7.09%
Vanguard Value Index (VIVAX) +7.73% +5.36%
Vanguard Total Stock Market Index Fund (VTSMX) +8.61% +9.33%

U.S. Large Cap Category Average

  10 Year Fund Return 10 Year Investor Return Investor’s Underperformance/Over-performance
Fidelity +8.62% +6.23% -2.39%
Vanguard +8.38% +7.03% -1.35%

Emerging Markets Equity

  10 Year Fund Return 10 Year Investor Return
Fidelity Emerging Markets (FEMKX) +10.06% +4.26%
Fidelity Emerging Markets Asia (FSEAX) +11.45% +4.02%
 
Vanguard Emerging Markets Index (VEIEX) +10.24% +9.46%

Emerging Markets Category

  10 Year Fund Return 10 Year Investor Return Investor’s Underperformance/Over-performance
Fidelity +10.75% +4.14% -6.61%
Vanguard +10.24% +9.46% -0.78%

Broad International Equity

  10 Year Fund Return 10 Year Investor Return
Fidelity International Capital Appreciate (FIVFX) +6.39% +7.99%
Fidelity Overseas (FOSFX) +5.82% +3.16%
Fidelity International Growth (FDIVX) +10.63% +9.02%
Fidelity Diversified International (FDIVX) +6.33% +3.6%
Fidelity International Discovery (FIGRX) +7.04% +2.89%
 
Vanguard Total International Stock Index +6.28% +6.38%

Broad International Category Average

  10 Year Fund Return 10 Year Investor Return Investor’s Underperformance/Over-performance
Fidelity +7.24% +5.33% -1.91%
Vanguard +6.28% +6.38% +0.1%

Small Cap Equity

  10 Year Fund Return 10 Year Investor Return
Fidelity Small Cap Discovery (FSCRX) +12.86% +16.04%
Fidelity Small Cap Stock (FSLCX) +7.86% +6.2%
 
Vanguard Small Cap Index (NAESX) +9.94% +9.13%

Small Cap Category Average

  10 Year Fund Return 10 Year Investor Return Investor’s Underperformance/Over-performance
Fidelity +10.36% +11.12% +0.76%
Vanguard +9.94% +9.13% -0.81%

Andrew Hallam is a Digital Nomad currently living in Chapala, Mexico. He’s the author of the bestseller, Millionaire Teacher.