The average shareholder probably won't outdo the S&P 500 this year, according to Louis Harvey, president of Dalbar, a Boston research firm.

The problem is that millions of investors are dumping funds. Struggling to pay their mortgages, hard-pressed homeowners are taking money out of their IRAs. Panicked shareholders are selling stock funds and buying Treasuries.

The timing of these moves couldn't be worse, says Harvey. When investors sell into a downturn, they lock in losses and miss out on the eventual rallies.

"When the market is going down, you should be buying," he says.

Harvey should know. For two decades, he has been tracking the behavior of fund investors. All too often people buy when the market is peaking and sell near the bottom.

One of the most dramatic examples of mistiming occurred in the 1990s when

Janus Twenty


rose and fell. In 1997, the fund had $6 billion in assets and an annual return of 29.7%. Seeing the giant results, investors poured into the fund, which reached $36 billion in assets by 1999. But the newcomers had arrived just in time for the collapse that came in 2000, when the fund lost 32.4%.

The bad behavior explains why many fund investors get miserable results, Harvey says. During the 20 years ending in 2007, the average equity fund shareholder had an annual return of 4.5%, more than seven percentage points behind the S&P 500.

The outlook for fund investors is not all bleak. In recent years, a growing percentage of assets has been coming into funds through 401(k) plans and other retirement accounts. Most 401(k) investors dollar-cost average, putting in set amounts each month. As a result, the plan participants buy shares on dips, a process that boosts long-term returns, says Harvey. The flood of cash into retirement plans helps explain why the average equity investor returned 7.1% in 2007, nearly 2 percentage points better than the S&P.

"Early in 2007, there was an influx of money into IRAs, and people stayed invested throughout the year," says Harvey. "This year, investors are selling after they look at their monthly statements and see big losses."

To get a clearer picture of investor behavior, Morningstar recently began keeping data on what it calls investor returns. The measure takes into consideration changes in a fund's assets as well as total returns. This indicates how the average dollar in a fund actually fared.

Say a fund gains 10% in the first half of the year, and then gives back 2 percentage points in the second half. The total return for the year would be 8%, but the investor return would be lower than that if money poured into the fund late in the period.

The investor return can be very different from conventional total return figures, which assume that all money was invested at the beginning of a period in a lump sum. During the past decade, technology funds produced an annual total return of 4.7%. But with too many traders buying high and selling low, the average shareholder had miserable results, and the investor return figure was -2.9%.

Checking the data, Morningstar found that volatile funds tend to report relatively low investor returns. Such funds swing up and down sharply, a tendency that can unnerve investors and lead them to sell. In contrast, steady funds tend to have good investor returns. This occurs because shareholders are less likely to panic and dump funds at the wrong time.

In many cases, volatile funds had relatively high total returns, but low investor returns. For example,

Legg Mason Aggressive Growth

(SHRAX) - Get Report

returned 10.7% annually during the 10 years ending in May, while the more mild-mannered

Dodge & Cox Stock

(DODGX) - Get Report

returned 9.9%. But the average shareholder had a much better experience in Dodge & Cox, recording an investor return of 9.8%, compared to 5.9% for Legg Mason.

At some funds, the investor returns are higher than the total returns. During the past decade,

Fidelity Contrafund

(FCNTX) - Get Report

returned 9.2% annually, but the average investor achieved 9.6%. In other words, thousands of investors exceeded the returns advertised by the fund.

This likely happened because many shareholders held the fund in retirement accounts and bought shares on dips.

What You Should Do

Should you avoid a fund with poor investor returns? Not necessarily, but you should exercise caution, says Christine Benz, Morningstar's director of personal finance.

"If you are inclined to sell at inopportune times, then you need to do some soul searching before buying a fund with poor investor returns," she says.

Some fund companies deliver consistently high investor returns. Winning fund families include

American Funds


Dodge & Cox


Franklin Templeton



. Such companies provide solid funds and encourage investors to stick around for the long-term. The winners refrain from offering trendy choices that will attract investors who chase after the hottest thing.

Steady funds with high five-year investor returns include

Mutual Qualified

(TEQIX) - Get Report


Oppenheimer Capital Appreciation

(OPTFX) - Get Report


Pioneer Cullen Value

(CVFCX) - Get Report


By buying them on dips -- and holding through downturns -- you're more likely to achieve solid results.

Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.