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Andrew Hallam is the index investor for Strategy Lab. Globe Unlimited subscribers can view his model portfolio here and read more in the series online here.

Félix Rousseau is the kind of guy who likes to play things cool. Each morning, he walks to work at the Royal Canadian Air Force base in Comox, B.C. The 25-year-old is an aerospace telecommunications technician. He fixes base-related components, including airfield equipment, radios, computers and audio systems.

Mr. Rousseau is careful at work. He's also careful with his money. He refuses to pay high investment fees. Last week, a financial adviser approached Mr. Rousseau. He was selling Fidelity's actively managed mutual funds. "The funds charge management expense ratio costs of about 1.7 per cent per year," Mr. Rousseau says. "The adviser also wanted a further 1 per cent per year to manage the money. Nobody should pay fees of 2.7 per cent. They would lose badly to a portfolio of index funds."

Morningstar's 2015 Global Fund Experience Investment Study says Canadians pay the highest mutual fund fees in the world. Mr. Rousseau is among a growing number of millennials who appear to be catching on. He built his own portfolio of TD e-Series index funds. He pays total fees of 0.41 per cent a year.

But does it pay to DIY? Michael Kim says it doesn't. This 25-year-old is an IT consultant in Surrey, B.C. He invests with WealthBar. It's a robo-adviser that builds and rebalances low-cost portfolios of ETFs. Including fund fees and platform charges, Mr. Kim pays about 0.90 per cent per year. "I could pay a fraction of that if I built a portfolio of stocks or ETFs on my own," Mr. Kim says. "But rebalancing is a constant issue for me and I feel that having the adviser will give me a safeguard against doing something silly."

Thirty-year-old Stephanie Williams says something similar. The Vancouver-based office clerk used to manage her own money. But she now prefers to have her index portfolio managed. "The fees are slightly higher than a self-managed ETF index portfolio," Ms. Williams says. "But they're very reasonable considering that you're going from effort to zero effort."

Plenty of ETF investors might scoff at this idea. But should they? Morningstar USA tracks index-fund performances. It also tracks how investors perform in each of those funds. If investors were rational, the results would be the same. If a fund averaged a return of 7 per cent a year, its average investor should earn the same return. But fear and greed sabotage investors.

For example, during the 10-year period ended Oct. 31, 2016, Vanguard's S&P 500 Index Fund (VFINX) averaged a compound annual return of 6.58 per cent a year measured in U.S. dollars. But investor returns in that fund averaged just 3.74 per cent a year.

These investors obviously bought more units after the fund had risen. They bought fewer units (or they sold) after the fund had fallen. I examined 10 different classes of Vanguard equity retail funds. Over the past 10 years, the average investor underperformed their funds by a whopping 2.60 per cent a year.

I compared those returns with their institutional share equivalents. Investors require at least $5-million to invest in each fund. That makes them fairly exclusive to pension funds, endowment funds and large institutions.

Their results might reveal how a financial advisory firm would perform if it built and rebalanced a portfolio of index funds. If such firms charged 1 per cent a year or less, would they outperform the average DIY investor?

The institutional investors were far from perfect. Measured over the same 10 equity classes, they underperformed their funds by an average of 0.95 per cent a year. But they trounced the returns of Vanguard's retail investors who, as stated above, underperformed their funds by 2.60 per cent a year.

Is it worth paying a financial adviser or a robo-adviser to build and rebalance a portfolio of low cost index funds? Most DIY investors would probably say no. Ms. Williams says that's wishful thinking. "Most DIY investors wrongly think they're more sophisticated than those silly clowns who panic-sell whenever the market drops."

Morningstar's data say that Ms. Williams might be right.

Who behaves better?

Institutional investors vs. retail investors, 10 years ended Oct. 31, 2016

IndexFund SymbolInstitutional Class ReturnInstitutional Investors’ ReturnBehavioral +/-Fund SymbolInvestors Shares Class ReturnInvestors’ ReturnBehavioral +/-
U.S. Total StockVITSX6.93%9.51%2.58%VTSMX6.80%7.79%0.99%
U.S. GrowthVIGIX8.17%8.90%0.73%VIGRX8.00%5.81%-2.19%
U.S. ValueVIVIX5.43%2.17%-3.26%VUVLX5.36%3.22%-2.14%
Extended MarketVIEIX7.36%8.56%1.20%VEXMX7.18%5.86%-1.32%
Mid-CapVMCIX7.50%7.41%-0.09%VIMSX7.33%5.51%-1.82%
Small Cap GrowthVSGIX7.79%8.99%1.20%VISGX7.63%7.57%-0.06%
Small Cap ValueVSIIX6.82%7.71%0.89%VISVX6.66%4.20%-2.46%
European StockVESIX1.01%-5.72%-6.73%VEURX0.92%-7.42%-8.34%
Emerging MarketsVEMIX3.54%3.09%-0.45%VEIEX3.34%3.27%-0.07%
Pacific Stock IndexVPKIX2.25%-3.38%-5.63%VPACX2.08%-6.46%-8.54%
Avg ann. percentage of over/underperformance by institutional investorsAvg ann. percentage of over/underperformance by retail index fund investors
-0.95%-2.60%

Source: Morningstar

Note: Morningstar doesn’t provide investors’ returns for Vanguard’s S&P 500 Index Institutional class.

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