The Wall Street Journal reports on the “behavioral return gap” that can cause investors to lose money even as the mutual fund they invest in shows gains over time. Investors often withdraw funds during periods of underperformance, causing them to lose money and miss the gains secured by subsequent increases in returns. “During periods of strong fund performance, investors pile in, but when fund performance is at its worst, short-sighted investors redeem in droves.” For example, Ken Heebner’s CGM Focus Fund gained 18% annually and was Morningstar’s highest performer for the decade ending 2009, but the average investor actually lost 11% annually over the period.

The problem is particularly evident in the context of value funds, which seek to buy undervalued stocks and hold them until their valuation increases. Citing a recent study by Professor Jason Hsu of UCLA with Brett Myers and Ryan Whitby, the Journal notes that from1991 to 2003, “value funds had annual buy-and-hold returns of 9.36%” but the “dollar-weighted” returns (those actually received by investors) for value funds were only 8.05%. Thus, “investors eliminate the long-run benefits offered by buy-and-hold value strategies through their attempts to time in and out of them.”