For several years, Morningstar has released its annual Mind the Gap study, which highlights the difference between what a fund returns and the returns investors actually realize.

The study underscores a familiar struggle: investors chase performance—jumping into funds after the best gains have passed, or bailing out during a slump only to miss the rebound.

The penalty for this behavior is steeper than many realize. Over the 10 years ending Dec. 31, 2024, Morningstar found that the gap between a fund’s time-weighted returns (what the fund earned) and investor returns (what investors earned) was –1.2 percentage points per year.

That’s right, the average U.S. mutual fund or ETF returned 8.2 percent annually, but the average investor only captured 7.0 percent. In other words, investors surrendered almost 15 percent of the market’s gains to their own bad timing.

You can see that some categories fared better than others, and Morningstar sliced the data in some other revealing ways:

• Active vs. Index: Index fund investors lagged their funds by –1.3 percent annually, slightly better than the –1.5 percent gap for active managers. But because index funds returned 9.5 percent versus 7.0 percent for actively managed funds, active investors suffered two kinds of pain: lower returns and a wider gap.
• Active vs. Active: Some active funds are “more active” than others, and those that strayed further from their benchmarks delivered worse investor outcomes. The quintile that hugged its benchmark most closely lagged by -0.9 percentage points, while the most divergent quintile lagged by -1.6 points.
• High vs. Low Volatility: Each category of funds (taxable bond, US equity, etc.) was also divided into quintiles, and within each category, the funds that were more volatile than other funds in the same category translated into lower investor returns.
• ETFs vs. Mutual Funds: Despite their popularity, ETFs were misused more often. ETF investors lagged by –1.7 percent annually, compared with –1.2 percent for mutual fund investors.
• Broad vs. Narrow: Investors in broad allocation funds (like target-date strategies) came closest to capturing full returns, with a gap of just –0.1 percent. Sector-fund investors (technology, industrials, etc.) fared far worse, underperforming by –1.5 percent.
• Stocks vs. Bonds: Bond investors didn’t behave worse than stock investors, but the impact of the bad behavior was far harsher. Bond investors lost about one percentage point to poor timing—similar in absolute terms to the –1.5 percent annual gap in sector funds. But because stock returns were strong, sector fund investors still captured about 82 percent of total returns. Bond returns were modest, so losing one percent meant bond investors kept only about half of what their funds earned.

The lesson? Exactly what we already know from experience: trade less, hold through periods of underperformance, and resist chasing the hot dot.

Advisors aren’t immune either—Morningstar’s data includes institutions, advised clients, and retail investors.

At Acropolis, we try to minimize these mistakes by writing target allocations into Investment Policy Statements, rebalancing systematically (including for tax-loss harvesting), and intentionally keeping turnover low.

We’re not perfect, but we continue to build our discipline and the infrastructure needed to avoid unforced errors to try and capture market returns.