Bad Timing Costs Investors 2.5% a Year

Tim Strauts: Today we're going to look at a chart that shows that investors are failing to capture the full return available because of poor market-timing decisions.

In this chart, we show the 10-year average total return for the major asset classes, and then next to it, we show the 10-year average Investor Return.

Investor Return is a Morningstar calculation that factors in the timing of the fund flows--whether investors bought at the top of the market or at the bottom of the market--to see the average return an investor would've received in that fund.

As you can see from this chart, on average, investors are losing about 2.5% per year to poor market-timing decisions.

A good example of this is the period between 2012 and 2013. The gray bars are the fund flows in 2012, and you can see that investors bought into fixed-income heavily and sold out of U.S. equities. And the red line is the subsequent return in 2013. So you can see that investors who sold out of U.S. equities in 2012 missed out on some of the big returns in equities in 2013, and investors who piled into fixed income in 2012 were barely able to break even in 2013.

The data shows that an investor is better served by sticking to a strategic asset allocation plan and filtering out the noise of whatever else is happening in the market.