Investors chasing hot funds get burned

Mutual-fund investors who constantly chase after high returns are more likely to lose out in the long run, according to a study released by Hartford, Conn.-based Phoenix Investment Partners.

Buying high and selling low caused the average stock-and-bond mutual-fund investor a shortfall of 20 percent over the past decade, it said, as investors responded to short-term influences instead of sticking to their long-term intentions.

According to the study, mutual-fund investors have nearly doubled their redemption rates since 1996. At the same time, the average amount of time investors held their money in a fund has declined to 2.9 years from 5.5 years in 1996.

Excessive portfolio turnover, combined with investors' propensity to buy stocks at or near their peak, while ignoring undervalued ones was the main reason for low performance, says Jack Sharry of Phoenix Investment Partners' Private Client Group. He adds that because most fund investors started trading in the '90s, they were conditioned by a booming market and therefore chased after riskier stocks. The downturn in technology last year has especially affected them, Mr. Sharry says.

"The study showed that as returns got better, behavior got worse. Mutual funds were designed for ... 10-year holding periods," he says. "There is natural safety in long-term diversification."

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