Investors are holding on to their mutual funds longer than at any other time. That should prove a big plus for those with long-term retirement goals, say fund analysts. Consider that in the late '80s, the average investor held his fund for 1.7 years. Now, it's up to 4.3 years, says market researcher Dalbar.

That's come at a time when the market has soared. But Harvey thinks that trend could prove fairly stable when times sour. "A large portion of U.S. households are now exposed to the markets," he said. "They've become more familiar with investing and mutual funds. So they're starting to understand that over time markets are resilient."

Is holding funds longer better? It seems so if you compare fund total returns to investor returns. Total returns measure how much a fund has gained or lost over a period of time, with dividend and capital-gain distributions reinvested.

But total returns are hypothetical, notes Harvey. They assume investors stayed in the fund for the whole period measured. "They don't take into account investors' behavior moving in and out of funds," Harvey said.

Investor returns measure how much the average investor actually made in a fund. They take into account asset flows into and out of the fund.

And judging by flow trends, the problem with past investor behavior is that it makes them look like wrong-way Harrys. Time after time, assets flood into funds after they've had a long run-up. Soon after that fund performance starts to roll over. And after funds go through sharp declines or extended periods of underperformance, investors yank out big chunks of assets -- all too often just before the funds hit bottom and start to rebound.

Author: Murray Coleman
Source: http://biz.yahoo.com/

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