Rather than chasing performance, as investors tend to do with equity funds, those who hold asset allocation funds tend to hold them longer, and as a result, experience better returns, according to a report from Dalbar, the “2007 Quantitative Analysis of Investor Behavior,” The Wall Street Journal reports.
The report examined real investor returns for equity, fixed income and asset allocation funds between 1987 and 2006.
The report notes the growing popularity of one particular type of asset allocation fund, the target-date fund, and says this is encouraging news for investors.
“The two huge pieces of good news are the flow of assets into asset allocation funds—it was the fastest-growing mutual fund segment in 2006—and that equity investors are actually beginning to hold on,” said Dalbar President Lou Harvey.
In the 20 years that Dalbar examined, investors hold asset allocation funds an average of 5.2 years, equity funds 4.3 years fixed income funds 3.7 years.
Investors have done a poor job of chasing performance, and as a result, have reaped only a small fraction of mutual funds’ gains, according to Dalbar.
“These mistakes occur because investors are driven by the fear that the markets will not recover—even though broad indices show that markets do, indeed, recover,” according to the report. “If you don’t know when to get out, it is better to stay in.”