Buy and hold. The approach sounds simple enough, but the average mutual-fund investor can't stomach it, according to an annual study by...

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Buy and hold. The approach sounds simple enough, but the average mutual-fund investor can’t stomach it, according to an annual study by financial-research firm Dalbar.

“Investment return is far more dependent on investor behavior than on fund performance,” Dalbar says. “Mutual-fund investors who hold their investments typically earn higher returns over time than those who time the market.”

Investors time purchases and sales based on market conditions, and hold funds for less time than they should, the study says.

Christine Benz, Morningstar’s director of personal finance, says her research shows a similar trend over a 10-year period. “Investors systematically underperform a fund’s published return,” she says, largely due to timing errors.

Surprisingly, investors are right about the direction of the market more often than not. They were right 61 percent of the time in the past 20 years, based on fund flows before market gains or losses, Dalbar says. Still, mistakes can prove costly.

“While it is obviously beneficial to avoid market downturns, very few investors do so consistently and successfully,” Dalbar analysts write.

Time horizon is another issue. For fixed-income fund investors, short holding periods boost the risk of earning less than the rate of inflation, in addition to underperforming benchmarks, the study says.

Dalbar notes holding periods for stock, bond and asset-allocation funds improved slightly in recent years, but fell back in the past year, likely due to volatility.

Dalbar says it’s best to invest on a set schedule, regardless of the market’s performance.

“A regular program of systematic investments combined with rebalancing when needed means that investors will buy low, sell high, and potentially beat both inflation and the market,” the report says.