Dalbar Finds Chasing Returns Causes Investors To Stumble

"The market is the force driving the behavior to hold equity funds for a little over two years–shorter even than the average for fixed-income funds," Dalbar observes.

The QAIB examined real investor returns from equity, fixed income and money market mutual funds from January 1984 through December 2002, analyzing data from the Investment Company Institute, Washington, and Ibbotson Associates, Chicago.

(ICI fund flow information includes data on institutional investors, which may not always closely reflect the behavior of individual investors.)

Dalbars newest study is similar to one it first did in 1994 of how mutual fund investors' behavior affects their returns.

The finding that fixed-income investors held onto their investments an average of six months longer than did equity investors explains why they did better, Hopkins says. Sticking to their guns a little longer "made a big difference in investment results" for fixed-income clients, Hopkins says.

Hopkins notes, too, that trading volume typically hits a high point two to three weeks after each market peak. That only demonstrates that people are poor at timing their buying and selling, she says.

The results hold important lessons for financial advisors, she points out. Clearly, individual investors need professional guidance to keep them focused on the long term.

"Thats also when the financial advisor does well," she says.

Its important for the advisor to present each financial product in terms of the objectives of the client, not on its past performance, she adds.

"That only leads them to attempt to chase performance," says Hopkins.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 28, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.