Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies

Posted: 6 Feb 2015 Last revised: 28 Dec 2016

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

Date Written: May 1, 2015

Abstract

The value premium’s persistence and magnitude 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 end investors earn, the authors quantify the consistently negative effect of value investors’ market-timing decisions: from 1991 to 2013, value mutual fund investors underperformed the funds they invested in by 131 basis points. Their analysis also reveals that investors in growth, large-cap, and small-cap funds are similarly prone to unproductive allocation timing. They also 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. The authors 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.

Keywords: value premium, mutual fund performance, behavioral finance, IRR, factor investing

JEL Classification: G10, G11, G14

Suggested Citation

Hsu, Jason C. and Myers, Brett W. and Whitby, Ryan J., Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies (May 1, 2015). Journal of Portfolio Management, Vol. 42, No. 2, 2016. Available at SSRN: https://ssrn.com/abstract=2560434 or http://dx.doi.org/10.2139/ssrn.2560434

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Brett W. Myers

Texas Tech, Rawls College of Business ( email )

Lubbock, TX 79407
United States

Ryan J. Whitby

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435.797.9495 (Phone)

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