Many long-term investors who swear they're buy and hold to the core are actually "accidental market timers". And they're paying a big price for their accidents. According to the latest Quantitative Analysis of Investor Behavior issued by Dalbar, Inc., the investors who pour money into stock funds on market upticks and dump funds on downturns aren't protecting themselves, they're killing themselves.

        Before delving into the numbers, it's important to look at the difference between someone timing the market based on tactical or defensive investment strategies and someone jumping around based on the occasional gut-wrenching, emotion-draining upswing or downtick. That difference involves commitment, knowledge and expertise. Specifically, the intentional market-timer has a strategy, backed by some know-how and the commitment to stick to it regardless of market conditions.

        The accidental timer is moving money around, thinking they are being defensive, but generally backing away from cold investments to move to what's been hot lately. The results of those moves, according to the Dalbar study, is that the average equity fund investor earned 2.57% annually for the past 19 years.  That's less than inflation (3.14%) and way short of the 12.2% annual gain for the S&P 500. The study showed that investors held a stock fund two years on average.

         The average bond fund investor fared slightly better, earning 4.24% per annum, according to Dalbar, good enough to beat inflation, but far short of the long-term government bond index's 11.7% annualized return. The holding period for a bond fund was also one year longer than with stocks.

        "What people need to realize is that the average investor didn't even make the inflation rate in funds, in spite of the fact that the stock market returns far exceeded inflation," says Lou Harvey, president of Boston-based Dalbar. That is pretty darned scary and it should be frightening people who move money around."

        Harvey says that "deliberate market-timing strategies cannot be doing this. It's not someone trying to beat the market, it's someone is sitting around at home and the wife has asked 'Hey honey, what the hell has happened to that $100,000 we said we were putting away?'... They answer that question by making moves in a panic.

        While some of the fault for poor performance lies with the fund managers whose returns have lagged appropriate index benchmarks, the conclusion behind the Dalbar study is that investors who haphazardly manage their active fund managers are more to blame. They would be better off following a buy-and-hold strategy than making periodic big changes in their portfolio.

        Fund specialists consider the two-year holding period on stock funds an almost sure recipe for disaster. Here's why: The fund heats up enough so that its recent record attracts new investors. When the average shareholder buys in, the fund's run is already showing. The momentum continues for a while, from six months to a year, before the fund's preferred asset category slips out of favor with the market.

        Still above breakeven, the investor hangs on, until the performance downturn reaches 12 to 18 months, at which point they dump the fund and move into something else with sexy current numbers. At that point, the process becomes self-perpetuating, and the gap between the returns an investor earns in funds and what they might earn by being patient grows.

        "People must come to terms with the idea that it is difficult to buy in at the bottom and hard to sell out at the top," says Jeff Tjornehoj, research analyst at Lipper, Inc. in Denver. "So if you buy, stay put and rebalance periodically, you're hedging your bets and will tend to do better."

        Harvey notes that investors should be buying funds they believe can "last until they need the money," and should try to find reasons to stick with those funds, rather than using recent performance as an excuse to bail out. Not surprisingly, the 1999 pre-bear-market version of the Dalbar study showed that investors were crushing inflation, with the average equity investor earning about 7% per year, although the S&P 500 was returning double that. The panicky sell-into-the-bear decisions dragged average returns down and made the performance gap wider. The good news is that the Dalbar study includes data through 2002 only, and that a 20% average gain for the market would likely bring average returns above the inflation bogey.

        The bad news is that matching inflation over a 20-year period- the probably results when the study is updated 12 months from now- is awful for equity investors.

        "Everyone says they're not timing the market, that they're not chasing hot funds," says Harvey. "But someone makes up these numbers... The real problem is people think this story applies to someone else, that they're not a part of this when, in fact, they're right in the middle of it and managing themselves into a poor return."