- The Washington Times - Wednesday, July 23, 2003

As Wall Street attempts a comeback, mutual fund investors who hope to make gains by trying to time the market might want to rethink this strategy — or face some heavy losses.

A study by market research firm Dalbar Inc. found that these investors often ended up buying shares at prices too high and selling them too low, ending up with a great loss compared with the overall market.

Indeed, investors held onto their stock fund shares an average of just 29.5 months from 1984 to last year, earning about a 2.6 percent annualized gain. That is less than the annual 3.1 percent inflation during that period and a 12.2 percent increase for the Standard & Poor’s 500 Index.

Bond investors similarly suffered. They held on to fund shares for 34.3 months on average, achieving a 4.2 percent annual gain compared with a 5.5 percent increase for Treasury bills, according to the study.

In addition, investors’ ability to time the market has diminished in recent years. According to Boston-based Dalbar, investors’ annualized return has progressively decreased since hitting a peak in 1992, largely because they churned their accounts with greater frequency.

“Investors are trying to time the market, and they’re doing it poorly,” said Dalbar spokeswoman Heather Hopkins.

The study, which calculates investors’ holding periods by examining cash flows into and out of funds, is unique in that it seeks to put an actual price tag on investors’ unsuccessful attempts to time the market.

Still, it is not clear whether the financial consequences really are that high.

Russ Kinnel, director of funds research at Morningstar Inc., a Dalbar competitor, agrees that investors often time the market unsuccessfully but said the results might be skewed by focusing solely on fund flows. He noted that if a fund had a small minority of investors with particularly high turnover, that might misrepresent the financial effect on the “average” investor since the vast majority of fund holders who stayed put — and didn’t buy or sell their shares — aren’t measured in the study.

“Obviously, buying high is not an ideal way to invest,” Mr. Kinnel said. “But [the study] might overstate it.”

The study’s findings, meanwhile, came as no surprise to financial planners. They noted that many investors resisted buying stocks after the market hit a low in March but rushed to buy after several weeks of stock rallies.

“I have found that it has been hardest to get clients to invest money when the markets are performing poorly, and easiest when they are performing well,” said Sean R. Cherry, a certified financial planner in West Palm Beach, Fla.

“What’s tough about timing is that you have to be right twice,” he said. “You have to get in at the right time, and then get out at the right time. You can get one, maybe, but getting both is really tough.”

Dalbar suggests investors refrain from trying to chase performance and, instead, focus on such financial goals such as saving to buy a house.

“We encourage them to look at the long term,” Miss Hopkins said. “Most investors are not savvy enough to time the markets effectively. In many cases, they may need help from a professional financial adviser.”

Others said investors might want to consider a buy-and-hold strategy or put money into index funds.

“Don’t judge funds by one year or two years of performance. You have to develop a plan for being diversified and stick with it,” Mr. Kinnel said. “People are better off focusing on things they can control, such as fund expenses, and investing in a fund that fits in with their goals.”


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