Morningstar’s Mind the Gap Report for 2026 found that investors’ timing of buying and selling of funds cost them 1.2% annualised return a year.
That’s a 12% difference in total return.
The funds involved held about $29.7 trillion, when they should have been worth $35 trillion. About $3.8 trillion of that difference was due to timing-related effects.
In other words, investors in aggregate lost nearly $4 trillion, or an amount equal to the GDP of countries like Japan or India.
How the report works
Fund returns use time-weighted total returns. This means they assume that a single investment is made at the start to the end of a period. This is the time-weighted return.
Investors don’t behave like that. Investors will put in and take out cash at various times. Investors experience internal rates of return, or the dollar-weighted return on investments.
In other words, dollar-weighted returns or IRR (internal rate of return) is the return that accounts for when you put in or take out money.
This doesn’t mean that investor behaviour is always flawed. Market timing contributes to this return gap. But healthy investor behaviour, like rebalancing or dollar cost averaging, also contributes to this return gap.
Morningstar found that broad-market fund investors captured more of their returns than alternative and bond fund investors
On the whole, US stock and allocation fund investors captured a large proportion of their funds’ returns (97% and 92% respectively). Allocation funds are funds with a predetermined asset allocation like 60% stock and 40% bonds.
The largest return gaps were found in US alternative, municipal bond funds, and taxable-bond funds, which captured 50-65% of their returns.
This tells us that investors do better with basic fund options like allocation funds or plain stock funds.
ETFs featured a similar pattern, but showed a wider return gap than comparable mutual funds.
It is probable that the ease of trading that ETFs offer result in more investor timing decisions and a larger gap between potential and actual returns experienced by investors.
Notably, both active and passive funds experience this return gap. This means that investors can mistime their investments even if they are index fund investors.
The fund’s volatility and fees also affect investor performance. Costlier funds return less and have a higher return gap than cheaper funds, and more volatile funds similarly return less and have a higher return gap than less volatile funds.
More volatile funds are thus likelier to result in this return gap for investors. If you are going to invest in a volatile fund, you should be aware that you will be more prone to mistiming your investments, and you should set a structured plan for entering and exiting the fund to avoid this.
Automate – have a plan and stick to it
The takeaways are simple.
Own less funds. Where possible, get them to rebalance for you. This can be through broker-offered features or by owning an asset allocation fund e.g. Vanguard’s 60/40 UCITS ETF.
Pursuing higher returns through stock picking and sector timing usually ends poorly, as these funds have higher fees and higher volatility. Instead, hold on to a diversified, broad-market, low cost index fund.
And avoid the temptation to look at it every day.
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