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It’s not what people would do if they were thinking rationally, but it’s what people do when their emotions get in the way of rational thought. We’ve seen it happen time and again.

David Swensen, of Yale’s endowment, recently wrote a commendable piece about this behavior for The New York Times. In it, he criticized the “mutual fund merry-go-round,” which does little to protect investors’ long-term interests.

Swensen makes a compelling argument for revolutionary change in the mutual fund industry, with aggressive regulation and fiduciary standards for brokers. These are great ideas that would help investors. He also advises individual investors to abandon over-priced, under-performing mutual funds and “take control of their financial destines, educate themselves, and invest in a well-diversified portfolio of low-cost index funds.”

This second part, about individual responsibility, sounds charmingly idealistic. It’s a little like saying the solution to healthcare costs is for people to eat better and exercise more. No doubt true, but unlikely to happen.

The reality? Even with the best of intentions, many of us are still going to panic and chase returns at the wrong time.

Read on …