Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies
Jason C. Hsu
Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business
Brett W. Myers
Texas Tech, Rawls College of Business
Ryan J. Whitby
Utah State University - Huntsman School of Business
May 1, 2015
The persistence and magnitude of the value premium run counter to the behavioral explanation of the value anomaly. How can investors continue to make the same widely recognized mistake? By examining the difference between mutual funds’ reported buy-and-hold or time-weighted returns and the average dollar-weighted returns or IRRs earned by end investors, we quantify the consistently negative impact of value investors’ market timing decisions: over the 1991-2013 period, value mutual fund investors underperformed the funds they invest in by 131 basis points. Our analysis also reveals that investors in growth, large cap, and small cap funds are similarly prone to unproductive allocation timing. We additionally find that less sophisticated investors tend to make poorer timing decisions: investors who hold funds with high expense ratios had larger return gaps than those who chose less costly funds, and investors in retail funds underperformed by a greater margin than those who qualified for institutional share class funds. We suggest that, by giving away the excess return, value investors themselves finance the value premium and ensure its continuance. Financial education may help individual investors refrain from trading their funds in a counterproductive fashion.
Number of Pages in PDF File: 16
Keywords: value premium, mutual fund performance, behavioral finance, IRR, factor investing
JEL Classification: G10, G11, G14
Date posted: February 6, 2015 ; Last revised: October 9, 2015
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
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