Why Investors Earn Less Than Their Own Investments: The Behavior Gap

How the gap happens

A fund's reported return assumes you invested at the start of a period and held on until the end. But real investors don't do that. They add money, take money out, switch funds, and react to the news.

The investor return measures what the average dollar actually earned, based on when money moved in and out. If more money comes in after a fund has done well, and more money leaves after it has done poorly, investors end up buying high and selling low, the opposite of what they intend.

A simple way to picture it:

• A fund has a great year. It's in the headlines. New money pours in near the top.
• Then the fund has a rough stretch. Investors get nervous and pull money out near the bottom.
• The fund recovers. But many of the investors who left aren't there for the recovery.

Over the full period, the fund's return looks fine. The investors' return doesn't.

In plain terms: the behavior gap isn't about picking bad investments. It's about what we do with good ones.

What it looks like in real life

The pattern shows up clearly during big market moves.

In 2020, when the pandemic sent markets tumbling, investors pulled roughly half a trillion dollars out of funds, according to Morningstar's research at the time. When markets rebounded, many of those investors missed much of the recovery.

The same study found the gap tends to be widest where funds are most volatile. Over the latest 10-year period, the gap was about 0.4 percentage points a year for the least volatile funds, and about 2.1 points a year for the most volatile ones. The more a fund swings, the more tempting it is to jump in and out, and the more that costs.

On the other hand, Morningstar found smaller gaps in allocation funds, like target-date and balanced funds, that combine stocks and bonds in a single fund. Investors in those funds tended to buy and hold more consistently.

And there's encouraging news too. For U.S. stock funds, the gap over the latest decade was relatively small. Investors earned about 12.8% a year compared with the funds' 13.3%. When people stay put, they tend to capture most of what the market offers.

What the gap costs over time

A 1.2-point gap might not sound like much. Over time, it adds up.

Let's say you invested $100,000 and it grew for 10 years. This is simple, hypothetical math, not a projection of any investment:

• At 9.9% a year, it would grow to about $257,000.
• At 8.7% a year, it would grow to about $230,000.

That's a difference of about $27,000 on the same investment, from timing alone.

Stretch it to 25 years, and the difference grows to roughly $1.06 million versus about $805,000, a gap of more than $250,000.

That's the power of compounding working against you.

Why we do it: the psychology behind the gap

The behavior gap isn't about intelligence. It's about being human. Our brains evolved to keep us safe from immediate danger, not to manage long-term investments.

Loss aversion

Research in behavioral finance suggests losses feel much more painful than equivalent gains feel good. A 20% drop hurts more than a 20% gain pleases. That pain pushes people to sell during downturns just to make the feeling stop.

Recency bias

We tend to assume whatever's happening now will keep happening. After a strong run, it feels like the market will keep rising. After a drop, it feels like it will keep falling. Both feelings lead to poorly timed moves.

Herd behavior

When everyone around us is buying, or panicking, it's hard not to follow. Social media and constant news make this even stronger.

Overconfidence

Many people believe they can tell when the market is about to rise or fall. Very few can do it reliably. Getting the timing right once is hard. Getting it right twice, out and then back in, is much harder.

Action bias

When things feel uncertain, doing something feels better than doing nothing. But in investing, doing nothing is often the harder and better choice.

Headline anxiety

Every week brings a new reason to worry: rate hikes, elections, trade wars, recessions, a single company's stock swinging the whole market. News is designed to grab attention, and alarming headlines grab the most.

Why staying put may be harder than ever

In some ways, it's never been easier to act on an impulse.

• Trading is instant and often free. A few taps on a phone can move an entire account.
• Markets are always on your screen. Apps send alerts, news runs around the clock, and prices update every second.
• Social media amplifies emotion. Stories of huge wins and panicked warnings spread fast, and they're rarely balanced.

Morningstar's research has found hints of this cost. In its previous edition, covering the 10 years ended 2024, the gap for ETF investors was wider than for traditional mutual fund investors, about 1.7 percentage points a year compared with about 1.2. ETFs aren't bad investments. They're often low-cost and efficient. But the same flexibility that makes them easy to trade can make them easy to trade at the wrong time.

Convenience isn't the problem. Acting on every impulse is. The easier it is to trade, the more valuable it is to have a plan that tells you when not to.

The moments that matter most

The behavior gap tends to widen during a few specific kinds of moments.

Market drops. The urge to sell and "wait until things calm down" is strongest when prices are lowest. And by the time things feel calm, prices have often recovered.

Market peaks. When a particular investment or theme has been soaring, the urge to pile in is strongest near the top.

Big news events. Elections, geopolitical crises, and economic shocks often trigger reactive moves.

Life changes. Retirement, a DROP payout, an inheritance, or a job change can bring pressure to make big investment decisions all at once.

Hot trends. Whether it's a new technology, cryptocurrency, or a stock everyone's talking about, fear of missing out drives a lot of poorly timed buying.

Habits that help close the gap

You can't eliminate emotions. But you can build habits that keep emotions from driving your decisions.

Have a written plan

Write down what your investments are for, when you'll need the money, and how you'll invest it. A plan written in calm times gives you something to hold onto in stressful ones.

Match investments to your timeline

Money you'll need in the next few years doesn't belong in volatile investments. When your short-term needs are covered by cash and bonds, a stock market drop doesn't force you to sell. That makes staying invested much easier.

Automate contributions

Contributing automatically, like through payroll deductions to a 457 plan, the FRS Investment Plan, or an IRA, takes timing decisions off the table. You buy consistently, whether markets are up or down.

Rebalance on a schedule

Rebalancing means periodically bringing your mix of investments back to your target. It forces you to trim what's done well and add to what's lagged, which is naturally the opposite of chasing performance. Doing it on a schedule, like once a year, takes emotion out of it.

Keep it simple

Morningstar's research found smaller gaps in simpler, all-in-one funds. The more complex a portfolio, and the more pieces there are to tinker with, the more tempting it is to trade.

Limit how often you check

Checking your balance every day during a volatile stretch can make you feel worse and push you toward action. For long-term money, looking less often can help.

Create a pause rule

Before making any big investment change, wait. A day, a week, whatever works. Many urgent-feeling decisions look different after a little time.

Talk it through first

Having someone to talk to before acting, a spouse, a trusted friend, or an adviser, adds a moment of reflection between feeling and action.

A tale of two investors

Here's a simplified, hypothetical story to show how the gap can open up.

Two coworkers each have $200,000 in their retirement accounts, invested in the same diversified fund.

Then the market drops 25% over several months. Both accounts fall to about $150,000.

The first coworker gets nervous watching the news and moves everything into a stable-value option to "stop the bleeding." They plan to move back in once things settle down. Months later, the market has recovered much of its loss, but it still feels risky. They wait longer. By the time they reinvest, the market is back above where it started. Their account is still around $150,000, plus a little interest.

The second coworker doesn't enjoy the drop either. But they have a plan. Their short-term needs are covered, so they don't need to sell. They keep contributing through payroll, buying more shares at lower prices. When the market recovers, their account recovers with it, and then some, thanks to the extra shares they bought during the drop.

Same fund. Same starting balance. Same market. Very different results.

The first coworker didn't make a crazy decision. They made a very human one. That's what makes the behavior gap so common.

Write your downturn plan now

One of the most useful things you can do is decide in advance what you'll do when the market drops. Decisions made in calm times tend to be better than decisions made in the middle of a scary headline.

A downturn plan might answer questions like:

• Where will my spending money come from if stocks fall? Having a year or more of expected withdrawals in cash or bonds, if you're retired, can mean never having to sell stocks at a low point.
• Will I keep contributing? For people still working, continuing automatic contributions during a drop means buying at lower prices.
• At what point will I rebalance? For example, if stocks fall far enough that your mix drifts meaningfully from your target, you might rebalance back, which means buying stocks when they're down.
• Who will I talk to before making changes? Naming a person ahead of time makes it more likely you'll actually call them.

Write it down. Keep it somewhere you'll see it. When the next drop comes, and it will, you'll have your own instructions to follow.

Questions to ask before you make a change

Not every investment change is a mistake. Sometimes changes make sense, like when your goals, your timeline, or your life circumstances change. The key is knowing why you're making a move.

Before changing your investments, it can help to ask:

• Has my plan changed, or just the market? If your goals and timeline are the same, a market move alone may not be a reason to change course.
• Am I reacting to something I saw or heard this week?
• Would I make this same decision if the market had gone the other way?
• What will I do next, and when? If you're selling, when would you buy back in, and how would you know?
• Have I talked to anyone about it?

If the honest answers point to fear, excitement, or a headline, it may be worth waiting.

A note for public employees

Many public employees have more control over their investments than they realize, through the FRS Investment Plan, 457 plans, 403(b)s, and IRAs.

That control is valuable. It also means the behavior gap can show up in your own accounts. Moving everything to a stable fund after a market drop, or jumping into whatever option performed best last year, are common ways people unintentionally buy high and sell low inside workplace plans.

For FRS Pension Plan members, the pension provides a steady base of income that doesn't depend on markets. That can make it easier to stay steady with other investments, since your core retirement income isn't riding on the market's ups and downs.

What I'm not going to do

I'm not going to tell you markets won't fall, or that staying invested will always pay off in the short run. Markets can fall sharply and stay down for a while.

I'm also not going to promise that working with an adviser guarantees better returns. No one can promise that.

What I will say is this. When it comes down to it, the biggest risk to a lot of investors isn't the market. It's the decisions they make when the market scares or excites them. And a plan you understand is one of the best defenses against that.

Let's build a plan you can stick with

The best investment plan isn't the one with the highest possible return on paper. It's the one you can actually stick with through market drops, scary headlines, and exciting trends.

That's the kind of plan I help clients build. We'll match your investments to when you'll need the money, set up automatic contributions and a rebalancing schedule, and make sure you have someone to talk to before making big changes, especially when markets are moving fast. And we'll look at how your pension or other guaranteed income fits in, so you know what's really at stake when the market swings.

I work as a fiduciary, which means I'm required to act in your best interest.

The market will do what it does. Your plan decides what you do.

Frequently asked questions

What is the behavior gap?

The behavior gap, also called the investor return gap, is the difference between the returns funds produce and the returns investors actually earn, caused by the timing of when investors buy and sell.

How big is the behavior gap?

Morningstar's 2026 Mind the Gap study found investors earned 8.7% a year over the 10 years ended December 31, 2025, compared with 9.9% for the funds themselves, a gap of 1.2 percentage points a year.

Why do investors earn less than their funds?

Investors tend to add money after funds have done well and withdraw after they've done poorly, which means buying high and selling low. Emotions like fear, loss aversion, and fear of missing out drive much of this.

How can I avoid the behavior gap?

Common habits include having a written plan, matching investments to your timeline, automating contributions, rebalancing on a schedule, keeping your portfolio simple, and pausing before making big changes.

Do target-date funds help with the behavior gap?

Morningstar found smaller gaps in allocation funds, including target-date funds, suggesting investors in those funds tend to buy and hold more consistently.

Educational content only. Not individualized investment, tax, or legal advice. Statistics are industry-wide data from Morningstar as cited and do not represent the performance of any client account or of Joy Financial Group LLC. Examples are hypothetical and for illustration only. Past performance does not guarantee future results. All investing involves risk, including loss of principal. Benowitz Wealth Management is a brand of Joy Financial Group LLC, a Florida state-registered investment adviser.

Neither Joy Financial Group LLC nor Benowitz Wealth Management is affiliated with, endorsed by, or employed by the Florida Retirement System, the Florida Division of Retirement, the State Board of Administration of Florida, MyFRS, or any government agency. FRS members may obtain free, unbiased guidance from the MyFRS Financial Guidance Line at 1-866-446-9377.