The head of manager research at Morningstar says too many are trying to time the market and doing a bad job of it.

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Investors have become increasingly adept at selecting mutual funds over the last quarter century.

They have focused on costs, and as a result the average expense ratio paid by shareholders has declined. They have favored passive index investing over active management, which has resulted in further cost improvements, but which also has made it easier for their portfolios to achieve results close to those of market benchmarks.

What they haven’t done yet is prove that they can time the market with any sort of success. In fact, seemingly every effort to time the market simply degrades the performance of the funds investors pick.

Morningstar this week proved that, again, with the release of “Mind the Gap 2017,” its latest study of investor returns and the first one that looked at investors all across the globe.

No matter where in the world investors are from, the numbers suggest, quite simply, that they suck at timing the market.

“Investor returns”

Morningstar’s study examines “investor returns,” which are the dollar-weighted results experienced by investors. Over the 10 years ended 2016, according to Morningstar, the average U.S. investor in diversified equity funds generated a return of 4.36 percent, despite the average diversified equity fund generating a gain of 5.15 percent.

The gap of roughly 0.8 percentage points was almost as large in bond funds, which is mostly alarming because bond returns are so much smaller than equity funds; the average bond fund returned 3.72 percent, according to Morningstar, but the average investor netted a hair under 3 percent.

The gap, as noted by Russel Kinnel, director of manager research at Morningstar, is a worldwide phenomenon.

It was worst, standing at 1.40 percentage points, in Singapore, but around the world investors who rely on their emotions or instincts to time their buys and sells wind up investing only after something has gotten hot — and the price has risen — and moving on once they feel some pain, and the prices have fallen.

“If it makes people feel better, the pros stink at it, too,” Kinnel said last week. “It is something we see consistently. When people try to time markets, they do a bad job. When people make emotional decisions, they’re not very logical, and market timing often means ‘I’m reacting to news that’s already out, that may well be priced in’ and that’s usually a mistake.”

Managing actively

In recent years, the problem has morphed a bit, with investors buying passive funds but managing them actively. Instead of deciding if they want a Coke or Pepsi in their stock portfolio — literally and figuratively — investors [and/or their advisers] are deciding if they want large-cap stocks or smaller ones.

Kinnel noted that investors would be better served with a simple buy-and-hold strategy, just leaving what they purchase alone.

Technically speaking, this measured the asset-weighted returns on the funds, based on the asset sizes from a decade ago; on this basis, the average investor in a diversified equity fund would have a return of 5.31 percent, which is nearly a full percentage point better than what the average investor got in gains, and which outperformed the average fund itself.

Kinnel noted that the problem isn’t really when fund investors upgrade from a bad fund in an asset class to something better. If you have a below-average small-cap fund and replace it with a better one, performance is likely to at least hold steady, if not improve.

“Where you get hurt is when you say ‘I’m selling 20 percent of my stock funds and putting it in bonds,” Kinnel said. “It’s when you say ‘It’s time to move from Asset Class A to Asset Class B. … Those are the kind of trades that really hurt you.”

What really helps investors, Kinnel noted, is making investing automatic and as painless as possible.

Positive gap

The one consistently positive gap over the history of the study comes from target-date funds — vehicles meant to be held long-term, which maintain age-appropriate allocations for a lifetime — largely because they are a favorite with U.S. investors in retirement plans.

The automatic and regular investment nature of regularly contributing with each paycheck ensures that investors are buying more when prices are down.

“The main point is that [for superior performance] you need to develop a plan, understand what the plan is and then stick to it and find ways to have the investment discipline to do it,” Kinnel said. “Investors did best across the world in formats where you were committed to automatically investing. We saw it in South Korea and Australia and in the U.S., where we have 401(k)s with target-date funds where people are committed to investing.

“People did great there because they forgot about it or barely paid attention, and that meant that rather than making a market call, they stuck with their plan,” Kinnel said. “Have a plan, commit to that steady plan and things are going to look up.”