To find out how well a mutual fund or exchange-traded fund has performed over a period of time, you typically look at its total return.
There are several assumptions built into this number. This means you put a chunk of money into a fund, leave it there forever, and periodically reinvest the dividends that come in.
Of course, that’s not how real people invest. After you buy a fund, you may end up adding a few more shares if the fund becomes popular. Or, if you find another investment you like better, you might sell some of it.
So even if you’ve held a fund for 10 years, the 10-year return you see on your portfolio page is unlikely to match the official return on the fund’s website. And, on average, investors’ returns are lower than the returns of the funds they own.
The average dollar invested in U.S. mutual funds and ETFs returned 7% annually over the 10 years ending December 2024, according to Morningstar’s 2025 Mind the Gap study. Over the same period, these funds returned an average of 8.2%.
In other words, investors lost about 15% of their profits over the 10 years analyzed by the researchers.
This 1.2 percentage point difference is what Morningstar researchers call the “investor return gap.” Generally, that can be attributed to investor behavior, said Jeffrey Ptak, managing director at Morningstar Research Services.
“You’re literally buying high and selling low,” Ptak said.
How to close the performance gap
The most obvious examples of self-defeating investor behavior occur during extreme market conditions, when over-enthusiastic investors rush into the market when stocks are already skyrocketing and panic sell when the market plummets, Ptak said.
But the kinds of behaviors that lead to poor long-term performance “may be much more routine than that,” he says. Buying a fund before the value of its holdings declines may be a coincidence of timing. Or maybe selling to raise money for something else will get that money going.
Morningstar data is not a perfect roadmap for maximizing returns from the funds you own, but it can reveal some possible strategies for keeping more of the money your fund earns. However, keep in mind that experts recommend consulting a financial professional before making any major changes to your investment strategy.
avoid taking undue risks
Generally, investments that involve higher levels of risk also provide higher returns. Among professional investors, this is known as the risk “premium.” However, data shows that if your portfolio includes a fund with high volatility, you are less likely to reach its full potential.
“Highly volatile funds are harder for investors to succeed in than less volatile funds,” Ptak says. “And that was true even when controlling for fund type.”
Across all types of mutual funds and ETFs, investors in funds in the least volatile quintile experienced a return gap of 0.4%, while those in the most volatile quintile experienced a return gap of 2%.
It’s impossible to draw precise conclusions about why, but it’s not hard to believe that economic psychology plays a role, Ptak said. In theory, the faster a fund’s performance soars, the more tempted investors may be to panic and sell when things get worse.
“Someone might follow this logic and think of investing in[riskier assets]that offer a premium return,” Ptak said. “That’s all well and good, but if you can’t hold out, you’re not going to get any risk premium. In fact, you’re probably going to have a gap.”
invest intentionally
Morningstar’s data tends to support the idea that investors who take a hands-off buy-and-hold approach generally outperform those who trade more frequently.
Case in point: Among the different types of funds researchers analyzed, allocation funds, which are primarily comprised of target-date funds, had the lowest investor gap on average, at just 0.1 percentage point.
The reason for this small difference is likely due to how these funds, which are designed to grow more conservatively as you age, are typically held: in long-term retirement accounts.
According to Ptak, the best way to keep the investment gap small is to invest in a diversified portfolio and automate your trading as much as possible to avoid discretionary or emotional trading.
“Less is more,” he says. “The fewer transactions you make, the better off you will be.”
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