Lynn O'Shaughnessy

Do you know how well your mutual funds have been doing?

For many of you, this will sound like a question that would stump only a simpleton. Turn on your computer and you can probably find the performance figures for any mutual fund within seconds.

But I'm not talking about those numbers. What I'm curious about is whether you know much about your returns. The reason this is so important is because most of us are experts at sabotaging the returns of our personal clutch of mutual funds.

Our weapons are unchecked fear, greed and a behavior that we should have left behind in middle school: an unbendable desire to do whatever the heck everybody else is doing.

What's become quite indisputable - thanks to an avalanche of academic papers - is that we gut our own returns with our brain waves. Our investment returns, you see, are far more dependent on our behavior, which is often irrational, than on any given fund's performance.

Behavioral finance experts can rattle off what prompts our irrationality. We are pained far more by losses than we are encouraged by gains, so we dump funds when they have lost money. Many of us only feel emboldened to embrace the market again when stocks have nearly reached the pinnacle of Mount Olympus again.

Being addicted by this buy-high, sell-low habit isn't our only transgression. We react to talking heads hyping stocks or mutual funds without giving any thought to whether their advice should be any more credible than the homeless guy holding a poster board at a busy intersection.

We get drawn in by the herd's euphoria. Before dot-com stocks became nearly as worthless as kindling, how many of us started hoarding tech stocks because everybody else seemed to be cruising along a yellow brick road that led to Buffett-sized fortunes?

One of the latest studies that illustrate investors' innate ability to blow it comes from Dalbar Inc., which conducts an annual quantitative analysis of investor behavior. The results share a dreary sameness when it comes to measuring Americans' investment prowess.

In its 2006 exercise, Dalbar examined what kind of returns the typical investor in stock and bond funds would have pocketed from 1986 and 2005 and compared them with two major market benchmarks.

During the past two decades, Dalbar estimates that the average stock fund investor would have generated a yearly return of 3.9 percent. That will probably strike you as underwhelming even before I share what the Standard & Poor's 500 Index generated during that same period: The S&P 500 rose an average of 11.9 percent annually.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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