When mutual funds report their results, it may look as if that's what their shareholders got. But in fact, many investors in those funds never got those returns. In this article, Merriman educator Tom Cock Jr. tells why. 

Many investors want to beat the market. But too often the market beats them.

Dalbar Research of Boston has studied this unfortunate phenomenon by looking at how much money goes into and out of mutual funds, and when the inflows and outflows occur. By doing this, the company can figure out what happened to the average dollars invested in mutual funds.

The numbers are bad news if you believe that investors are smarter and more successful these days because of all the information and advice coming from Wall Street.

For the most recent 20 calendar years, 1986 through 2005, the Standard & Poor's 500 Index compounded at a rate of 11.9 percent annually. According to Dalbar, the average dollar invested in U.S. stock funds in those years achieved a return of only 3.9 percent. That was only barely ahead of inflation.

Bond investors didn’t do so well either. For those same years, an index of long-term government bonds grew at 9.7 percent a year. (This was higher than normal for bonds, as this was a time of falling interest rates.) According to Dalbar, the average dollar invested in fixed-income funds grew at only 1.8 percent a year.

Why did this happen? In a nutshell, lousy timing. Too many investors thought they knew when to get in and when to get out. Mostly, they were wrong. I see three lessons in these numbers.

First, people buy the wrong investments at the wrong time. After billions of dollars poured into technology stocks in the late 1990s, the Nasdaq lost nearly 80 percent of its value. Think about that before you rush to buy gold and real estate funds.

Second, investors rely on bad advice from professionals whose real job is to sell. An academic study found that stock and bond funds sold by brokers (load funds, in other words) consistently underperformed no-load funds, even without counting the effect of sales commissions and 12b-1 marketing fees.

Third, as you probably know by now, emotions often get the best of us when it comes to money.  Study after study has concluded that even when we think our financial decisions are rational, they usually aren’t.

So, you must be wondering, is there any good news in all of this? I’m happy to report that there is.

Dalbar also found that investors who have the discipline to make a plan and stick with it in good times and bad times have a much higher probability of faring well.  If you don’t panic as the market goes down, and if you don’t go crazy as the market goes up, you have an excellent chance of achieving the returns of the market.

That may sound like a recipe for being average. But according to Dalbar’s numbers, that could  make your returns decidedly above average.