Timing poorly: A guide to generating poor returns while investing in successful strategies

The value premium's persistence and magnitude run counter to the behavioral explanation of the value anomaly. How can investors continue to make the same widely recognized mistake? By examining the difference between mutual funds' reported buyandhold or timeweighted returns, and the average dollarweighted returns or IRRs end investors earn, the authors quantify the consistently negative effect of value investors' markettiming decisions: from 1991 to 2013, value mutual fund investors underperformed the funds they invested in by 131 basis points. Their analysis also reveals that investors in growth, largecap, and smallcap funds are similarly prone to unproductive allocation timing. They also find that less sophisticated investors tend to make poorer timing decisions. Investors who hold funds with high expense ratios had larger return gaps than those who chose less costly funds, and investors in retail funds underperformed by a greater margin than those who qualified for institutional shareclass funds. The authors suggest that, by giving away the excess return, value investors themselves finance the value premium and ensure its continuance. Financial education may help individual investors refrain from trading their funds in a counterproductive fashion.