The big mistake mutual-fund investors make

You have probably heard about what’s known as the DALBAR effect. It’s the fact that, as a group, mutual-fund investors underperform the funds in which they invest.

Quick background: The reason for this effect, amply documented over nearly a quarter-century by a Boston research firm, is investors’ behavior.

In short, mutual fund shareholders tend to buy and sell based on their emotional reactions to bull markets and bear markets, real or expected. Their timing is usually wrong, and in the end they would have done better by buying and holding.

(For a more detailed look at this effect, check out this article.

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