More Evidence Investors are Poor Timers

By on April 12, 2010

Mark Hulbert reports on a new study which shows mutual fund investors make bad timing decisions.

The new study, “Measuring Investor Sentiment With Mutual Fund Flows,” is forthcoming in the Journal of Financial Economics, an academic publication. Its authors are Avi Wohl, a finance professor at Tel Aviv University; Azi Ben-Rephael, a Ph. D. student there; and Shmuel Kandel, now deceased, who had been a finance professor there.

The researchers focused on exchanges between equity and fixed-income funds in the same mutual fund family. In line with previous research on money flows into and out of mutual funds, they found that as the stock market rises, investors tend to transfer money from bond funds to stock funds, and vice versa. They also found something that had escaped notice among researchers: that the stock market tends to reverse itself in the weeks and months after these exchanges.

For several months before the beginning of the bull market in March 2009, for example, fund investors on average transferred money out of stock funds and into bond funds. It’s a common pattern. Little wonder, then, that the average mutual fund investor would be far better off if he never engaged in stock market timing.

Still, the research also shows how we might become better market timers. The key is to do the opposite of what the average mutual fund investor is doing — in other words, to become a contrarian.

Source: The New York Times
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