According to a recent Marketwatch article[3], most investors say they invest for the long term, but research into the buying and selling habits of mutual fund investors may indicate otherwise. 

According to research firms Morningstar, DALBAR and other academic studies, the average investor underperforms the market by a whopping 5% per year. Even worse, investors underperform their own mutual fund's performance by 1.5% to 2% per year. 

As in the Black Swan events, investor's inappropriate behaviors - buying high and/or selling low at important market junctures sabotaged investors efforts to either earn more money or protect the money they had. In other words, the average investor would earn far more money by leaving their investments alone. Being proactive (at least in the minds of some investors), dramatically worsened their returns. The article also describes certain other types of inappropriate rebalancing behaviors as market timing in disguise. This is where an investor may sell a mutual fund to pursue a "hotter" mutual fund (performance chasing). 

However, the use of dollar cost averaging which refers to investing a fixed amount of dollars at fixed time intervals actually enhanced returns by 0.25% so by doing nothing, investors actually outperformed their own mutual fund investments! 

I always counsel clients to rebalance in the appropriate manner by selling the investments that have gone up the most in value and reallocating to the investment that is temporarily out of favour. Although this strategy seems counterintuitive at first, using strategic reallocation despite our hard wired Cro-magnon fear or flight instincts, gives us the best chance to enhance our investment returns. 

Have you see that TV commercial where the doctor is giving surgery instructions over the phone to his patient? The patient is holding a scalpel in his hand? The commercial although funny tells us the obvious; that do-it-yourself surgery is generally not a good idea and the same applies to do-it-yourself investing. We are much too biased to make our own objective investment decisions. 

Next month, we'll look at a specific type of investment that may help to short circuit our natural tendencies to bad or inappropriate investment behaviors. 

[3] Source: Marketwatch.com, Chasing returns puts less money in your pocket by Chuck Jaffe April 3, 2011, 12:01 p.m. EDT 

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