Every year, Morningstar publishes its Mind the Gap study, a detailed look at the difference between what funds return in theory and what investors actually earn in practice. The latest edition, covering the 10 years to the end of 2024, offers a sobering reminder: timing matters, and not always in the way investors hope.
The gap between funds and investors
On paper, US mutual funds and ETFs returned an average of 8.2% per year over the past decade. But the average investor saw only 7.0% per year. That 1.2 percentage point gap, which equates to roughly 15% less wealth, is explained almost entirely by when investors decided to buy and sell.
Instead of simply holding, many investors tend to chase performance, buying after markets rise and selling when they fall. Even well-intentioned habits, like rebalancing or investing gradually, can widen the gap if mistimed.
What drives the shortfall?
Morningstar’s analysis highlights a few key patterns:
- Volatility matters: Investors in the most volatile funds had the hardest time sticking with them, leading to wider return gaps.
- Costs matter too: Cheaper funds generally showed smaller gaps, partly because they’re often used in long-term, diversified portfolios.
- Fund type matters: Investors in broad allocation funds (like target-date strategies) stayed closer to the funds’ theoretical returns, while those in niche sector funds often lagged furthest behind.
- Trading hurts: The more frequently investors moved money in and out, the less they earned.
In other words: the more investors traded, the less they made.
What this means for you
It can be frustrating to see a fund deliver strong long-term returns, only to realise that the average investor captured far less of that performance. But the lesson here isn’t that individual investors are doomed to underperform. It’s that behaviours and choices make a difference.
At Moneyfarm, we believe the best way to close this gap is to stick to a few timeless principles:
- Stay invested: Markets reward patience over the long run.
- Avoid market timing: Chasing short-term moves almost always backfires.
- Diversify: Broad, balanced portfolios help reduce the urge to jump in and out.
- Keep costs low: Fees eat into returns, so minimising them is essential.
- Financial planning: Goals and time horizon.
This gap also tends to be smaller when you invest through a managed portfolio. Professional oversight helps reduce the temptation to time the market, encourages discipline in volatile periods, and ensures your investments are steered by long-term objectives rather than short-term emotions. With someone continuously monitoring and adjusting the portfolio, you benefit from structure and consistency – both of which make it easier to stay invested and ultimately favour returns.
By focusing on these pillars, you can give yourself the best chance of capturing the returns markets have to offer, without falling into the “gap” that catches so many investors.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
