Owning a fund does not mean earning the fund’s return. A factsheet’s figure assumes one purchase held from the first day to the last, and hardly anyone invests like that: money goes in with each paycheck, comes out for a house deposit, and sometimes moves because the news turned. Each of those dates changes what your money earned.

The investor behavior gap is the difference between the two: the return a fund reports minus the return its investors actually earned once the timing and size of their deposits and withdrawals are counted. Studies agree that investors’ own returns tend to trail their funds’; they disagree sharply on how much of that is bad timing and how much is arithmetic. The evidence is mostly from US funds, so readers elsewhere should take the figures as a guide to how the gap works, not to its size in their own market.

The part that applies to your own money is short. Find the money-weighted return on your statement, if your provider shows one, set it beside the fund’s return for exactly the same dates, and count the trades you made that were not in your plan; the checklist near the end walks through it. The rest of this page explains one reason behind the common advice to beginners: investing regularly and leaving it alone: how the best-known estimates are built, why they disagree, and which part you control.

Two ways to count a return, and why they disagree

A fund’s published return is time-weighted: it shows what money invested at the start and held to the end would have earned, ignoring when anyone bought or sold. Your own return is dollar-weighted, also called money-weighted: an internal-rate-of-return calculation that gives more weight to the months when you had more money invested, as Morningstar explains in its annual study of the gap.¹

The same percentage move lands on different amounts of money. If most of your money arrives just before a bad year, that year hits a large balance; if it arrives before a good year, the good year counts for more. The fund’s own return treats every month alike, because it follows one unchanging holding.

So a gap can open without a single bad decision. The drawing below works through an invented two-year example: a saver adds the same amount at the start of both years, and the only thing that changes is whether the good year or the bad year comes first. The fund reports the same return both times; the saver’s own result swings from a small loss to a healthy gain.

1. One fund, either order: up 20% one year and down 10% the next reports about 3.9% a year, whichever year comes first
2. Good year first: a saver who adds 1,000 (in any currency) at the start of each year ends with 1,980 from 2,000 paid in: about −0.7% a year
3. Bad year first: the same saver, making the same deposits, ends with 2,280: about 9.1% a year
4. Nothing but the calendar changed: more money was invested during the second year, so that year counted for more. An invented example; our arithmetic

The same pattern shows up in whole stock markets. Ilia Dichev’s 2007 paper in the American Economic Review used dollar-weighted returns to show that investors’ actual returns were systematically lower than buy-and-hold returns in nearly all major international stock markets.² A later paper in the Journal of Financial and Quantitative Analysis, summarizing his results, puts the shortfall at about 1.3 percentage points a year for US stocks on the NYSE and AMEX from 1926 to 2002, and at about 1.5 points across 19 international stock exchanges from 1973 to 2004.³

So when your statement and the factsheet disagree, look at the dates before you blame yourself. Your figure describes your money; the fund’s describes a holding nobody may actually have had.

The investor behavior gap as Morningstar measures it

Morningstar’s annual Mind the Gap study is a regular estimate whose full method is published. It pools the assets and monthly cash flows of US mutual funds and ETFs, then compares the pool’s dollar-weighted return with its time-weighted return over ten years. It is commercial research by a fund-data company and is not peer reviewed.¹

The study

Mixed evidence

What the average dollar earned in US funds, 2015 to 2024 (Morningstar, 2025)

The average dollar invested earned 7.0% a year before inflation, while the funds themselves returned 8.2% a year: a gap of about 1.2 percentage points a year, equal to around 15% of the funds’ total return. Gaps of similar size appeared in the 10-year periods ending in 2020, 2021, 2022 and 2023, and they were widest in funds whose cash flows swung the most.¹

Read the method before the headline. The study measures the average dollar, not the average investor, and Morningstar says plainly that its figure is not a proxy for the average investor’s own return. It counts funds that merged or closed during the decade but leaves out every fund launched after the start date.¹

it’s not advisable to view this study’s findings as a parable of “dumb money” or evidence of individual investors’ fallibility.

Outside the US the picture varies by market. Morningstar’s 2023 study of six other fund markets found negative gaps in all of them from mid-2018 to mid-2023, smallest in Australia and the United Kingdom, where it describes financial advice as more holistic, and largest in the cross-border fund hubs of Ireland and Luxembourg, where funds are often sold as stand-alone products.⁴ In its previous global study, the same report notes, investors in Australia and the UK had come out ahead of their funds.

A gap belongs to a market and a period as much as to its investors: a figure from one decade says little about the next, and a US figure little about a fund bought elsewhere.

Dalbar’s headline number and the case against it

Dalbar’s Quantitative Analysis of Investor Behavior, a report sold by a US financial-services research firm, produces the biggest and most quoted gap figures. For 2024 it put the average US equity fund investor’s return at about 16.5 percent, against about 25 percent for the S&P 500 index.⁵ For 2025 the same measure shrank to a gap of under 1 percentage point, the smallest since 2012 by Dalbar’s count.⁶

A measure of habits that swings from about a third of the market’s gain to almost nothing in a year invites caution. The full method is in a paid report, and at least one detailed critique calls the comparison lopsided. In 2012 the personal-finance blogger Harry Sit pointed out that Dalbar sets investors’ dollar-weighted returns against an index’s time-weighted return, so the order in which good and bad years arrive gets counted as investor behavior.⁷

Sit also noticed that in Dalbar’s own 2012 edition, its average equity fund investor had earned slightly more over the 20 years to 2011 than a hypothetical investor putting in a fixed amount every year. He argued that because Dalbar sells the study to financial advisers, it has an incentive to overstate how badly investors do on their own.⁷

When a behavior-gap statistic turns up in an adviser’s slides or a news story, ask three questions before you believe it: over what period, compared with what benchmark, and would a steady saver who never reacted have shown the same gap?

How much of the gap is really bad timing?

Less than the famous figures suggest, according to two peer-reviewed reanalyses. A 2014 paper by Simon Hayley of Cass Business School in London found that most of the dollar-weighted shortfall for mainstream US stocks was a hindsight effect rather than bad investor timing.³ A 2026 study in the Financial Analysts Journal found that poor timing cost the mutual fund investors in Morningstar’s US sample only about 0.1 percentage point a year.⁸

Hayley’s argument turns on when money moves. New money tends to follow past returns, arriving after markets have risen. That pattern drags the dollar-weighted figure down even though it does nothing to investors’ expected wealth; only flows that anticipate future returns reveal real timing skill, or its absence.³

Picture a saver whose bonus tends to be larger after a strong year and who invests it when it lands. Her dollar-weighted return can trail the fund’s, yet nothing about the decision was reckless: the money arrived when it arrived (an illustrative case).

Jon Fulkerson and colleagues went back to the same fund sample Morningstar used for its 2025 study and reached their much smaller estimate. Only their abstract was available to us, so the reasons for the difference are not covered here.⁸

Myth

The behavior gap proves most investors panic their way out of a large share of the market's return.

Fact

Part of any measured gap is arithmetic about when savings arrive. A 2026 peer-reviewed reanalysis finds the pure cost of bad timing for US fund investors as a group is small, and the question is still debated.

None of this makes timing mistakes harmless: selling after a fall and buying back after a recovery can still hurt one person’s result. It means the group averages are shaky, and yours can sit far above or below them.

Trading is where the cost is clearest

The firmest evidence of investors costing themselves money concerns trading, not the timing of fund flows. In the records of about 66,000 US households at one discount broker between 1991 and 1996, Brad Barber and Terrance Odean found that the fifth who traded most averaged 11.4 percent a year once costs were paid (before inflation), while the fifth who traded least averaged 18.5 percent.⁹ Put simply, the busiest traders’ yearly return was more than a third lower than the quietest traders’.

Before costs, frequent and infrequent traders earned much the same, so commissions and the gap between buying and selling prices made the difference. The authors argue that overconfidenceoverconfidence: Being more sure of your knowledge, skill or forecasts than the results justify, for example rating yourself above average or giving too narrow a range for an estimate. It is broader than the Dunning-Kruger effect, which is about how the error varies with skill.Full entry in the glossary can explain why people trade so much.⁹ The caveats matter: one broker, individual shares rather than funds, and a strong US market in the 1990s, so the figures describe that group, not today’s investors.

Someone who swaps one holding for another every few weeks pays a small toll each time; in Barber and Odean’s data, those tolls, not worse choices of shares, separated the busiest traders from the quietest.

Morningstar’s fund data point the same way. Its 2025 study found the widest gaps in funds with the most volatile cash flows, which it treats as a sign of heavy trading, and it concludes that if anything predicts poor dollar-weighted returns, it is trading activity.¹ Other habits feed the same pattern; the pull to sell winners and cling to losers is covered in the disposition effect and why investors hold on to losing investments.

Where gaps were smaller, and what that suggests

The evidence on narrowing the gap is observational: it shows where gaps were smaller, not what would shrink yours. In Morningstar’s 2025 US data, allocation funds, which hold a mix of assets and rebalance on their own, had the narrowest gaps, and the most popular fund categories had narrow-to-moderate ones, which Morningstar links to steady use inside retirement plans.¹

Whether index fundsindex fund: A mutual fund or exchange-traded fund that aims to track a market index by holding the securities in it, or a sample of them. Tracking an index does not protect against losses, and funds tracking the same index can charge very different fees.Full entry in the glossary help is contested. The 2025 US study found active and index funds had roughly comparable gaps and warns against assuming indexing brings better dollar-weighted results.¹ The 2023 global study found narrower gaps in index products than in their active counterparts.⁴ Neither finding is a reason to choose a particular fund, and this page recommends none.

What carries over is a way of working. A saver whose statement trails the factsheet checks two things before switching funds: whether her deposits bunched just before a fall, and whether she made trades she had not planned. The first is the calendar; only the second is behavior worth working on.

WiserHours

Checking your own gap

• Find the money-weighted return on your statement, if your provider reports one
• Compare it with the fund’s reported return over exactly the same dates
• Note when your largest deposits and withdrawals happened
• Count the buy and sell decisions you made that were not in your plan
• Write down in advance when you will add money, rebalance or withdraw

Find this checklist online:
https://wiserhours.com/investing/behavior-gap/#checklist-behavior-gap-own-return

Before acting on a gap you have found

Research on the behavior gap cannot weigh your taxes, your goals or the rest of your money, so decisions that turn on those deserve personal advice, sooner in some situations than others.

• Now, if anyone urges you to move money fast or to switch into a product they sell: pause and look them up on your own national financial regulator’s register. For US investors, the Securities and Exchange Commission’s Investor.gov site says, as of 2026, to always check a financial professional’s background to confirm a license.¹⁰ For the UK, the Financial Conduct Authority’s guidance, updated in September 2026, sets out how to check a firm, since nearly every firm providing financial services there needs its authorisation or registration.¹¹
• Soon, before a large switch or a sale that could trigger tax: a regulated adviser or tax professional can work through your own numbers. Ask at the start what they charge and who else pays them.
• Routinely, once a year: set your own return beside your funds’ returns for the same dates, and review which trades you made and why.

The bottom line

Your return and your fund’s return measure different things, and the difference comes partly from when your money arrived, not only from what you did with it. The large gap figures are the least reliable, and a 2026 peer-reviewed reanalysis of US fund data found the pure cost of bad timing for fund investors as a group to be small. The clearest cost is frequent, unplanned trading, and that is the part you control.