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1. Charges are part of the explanation.
Mutual fund investors pay not only management fees but also the trading costs within the funds they hold.
They also pay further trading costs when they themselves buy and sell, which they do too often.
2. But the principal explanation is bad timing.
Retail investors buy high, and sell low. They are late into fashionable sectors, and late out of unfashionable ones.
There is probably no worse investment strategy than following the conventional wisdom with a time lag, and that is precisely what many small investors do – often with the encouragement of their advisers.
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