It is widely known, and studied, that investors as a group do not come close to realizing the returns of the asset classes in which they are investing. The propensity of too many investors to buy at highs, sell at lows, stay out of things that have just declined until they return to their old ranges or highs, constantly change strategies (if there is a strategy at all) -- it's all too common. And the result is significant underperformance by the average investor compared with the returns of the market itself.

The starkest display of the costs of this behavior, as far as I'm aware, is an analysis by Dalbar, of the returns of the average investor over the 20-year period from 1995 to 2014. During that time, the S&P 500 returned 9.9% annually, bonds returned 6.2%, gold 5.9%, and foreign stocks (as measured by EAFE) 5.4%. The average mutual fund investor, according to the study, realized returns of 2.5% -- significantly worse than those who simply chose the worst selection in the menu of choices and stuck with it. Inflation over the period was 2.4%, so the average investor narrowly avoided losing money in real terms.

If even remotely accurate, that is among the most startling figures I have ever seen in all my years of researching investor data. It cannot be explained by the performance of mutual funds themselves -- which, as a group, do underperform their benchmarks, though typically by about 1.5% to 2% annually. It is more a testament to the poor timing of investors -- getting out of funds and sectors that have underperformed, moving into the ones at the very top of the recent best-performers list, and, still worse, selling when scared by a decline in the market and then waiting to get back in at the wrong time.

Of course, the time period of 1995-2014 exhibited some truly extreme behavior in the domestic equity (and housing) markets. The run-up from 1995 to early 2000 lured a lot of money into the market from investors who had little or no experience and saw the dot-com bubble as a get-rich-quick opportunity, while a crash from 2000 to 2003 was similarly extreme. And then 2008-2009 presented another harrowing experience in the market for investors. It's no surprise that this period would show extremely disappointing results.

Recent data from Morningstar indicates that investor behavior in this category is improving slightly. The Morningstar data compares the returns of investors in mutual funds with the returns of the funds themselves. If a mutual fund produces 8% returns over 10 years, but its average investors realize only 7% returns, then that indicates that the investors tend to buy after the fund's good runs and sell after relatively poor ones, causing them to earn 1 percentage point less per year than someone who had simply held the fund throughout the time period, realizing the same exact returns that the fund reports as its results.

Morningstar shows that in 2014, investors came closer to realizing domestic stock fund returns than they did in the two previous years, but there is still a problematic lag of approximately 1%. Perhaps unsurprisingly, the gap between the total returns of international funds and investor returns is much greater. The rolling 10-year records for international funds from 2003 to 2012 and from 2004 to 2013 each show a lag of over 3% annually -- a staggering tax on investor behavior. According to the data, international mutual funds returned a very respectable 9.95% between 2003 and 2012, while investors in those funds realized only 6.84% -- leaving about a third of their returns on the table by mistiming their moves in and out of the asset class.

These return deficiencies apply to all asset classes -- not just equities, and not just in mutual funds. Investors have a well-documented tendency to act against their own long-term interests by reacting to market-price movements. This point is worth bringing up now, as it appears more and more likely that the Federal Reserve will raise interest rates before long. There will be a lot of advice in the media about how to "play" an interest rate move. I say this mostly because for the past seven years there has been plenty of speculation on how to "play" an interest rate move, and we are still waiting for the first move since 2008.

I'm not sure whether there's a decent way to play interest rates -- and even less sure that one can time that play by following published advice on it -- but I'm pretty sure that the group of investors who stick to an asset-allocation plan over time will handily beat the group of investors who make frequent moves based on news, calls, and intuitions about what the next hot thing will be.

Generally speaking, if you place yourself in the category of investors who have a long-term asset-allocation plan and stick to it, then you're incredibly likely to realize the returns of the markets you participate in, most of which are quite attractive over long periods of time, such as 20 years. If you're among the investors who react to the latest news and frequently switch asset allocations -- whether you realize it or not -- then you are taking on significant risk of realizing poor returns over the next 20 years. And if the next couple of decades look anything like the last two, then you're not likely to beat inflation by much.

But be alert
No matter where or how you invest, it's always important to control your costs. That's why my team recently produced a new special report uncovering a number of "hidden costs" you might not normally consider. It's absolutely free, and you can access it by following the link here.