Investors in US funds earned 8.7% a year over the ten years to 2025 while the funds themselves returned 9.9%. The gap comes from when people buy and sell, driven by a handful of well-studied biases. Each has a simple counter-measure, and couples can turn those into shared rules that make the costly decision harder to take alone.
Two people can own the same fund for the same ten years and end with very different results. The fund reports one return; each investor earns their own, depending on when they put money in and took it out. Across a whole market the difference is large and remarkably steady, and most of it comes from a short list of mental habits that psychologists and economists have measured for half a century.
This article measures the gap, then takes the biases one at a time: what each is, how it shows up in an ordinary household, and one concrete counter-measure. It ends with rules a couple can agree to protect each other from their worst days.
Morningstar’s annual Mind the Gap study compares two returns for the same US mutual funds and ETFs: the funds’ own total return, as if a single sum had been invested and left alone, and the dollar-weighted return their investors actually earned. Over the ten years to the end of 2025 investors earned 8.7% a year against 9.9% for the funds — a gap of about 1.2 percentage points a year, roughly 12% of the funds’ return. In money, Morningstar estimates those timing effects at around $3.8 trillion over the decade.1
What US fund investors earned against what their funds returned, a year, over the ten years to 2025
| Investors’ return | Funds’ total return | |
|---|---|---|
| Allocation | 7.8% | 8.4% |
| US equity | 12.8% | 13.3% |
| International equity | 7.8% | 8.9% |
| Sector equity | 9.4% | 10.6% |
| Taxable bond | 1.9% | 3.0% |
| All funds | 8.7% | 9.9% |
The detail is telling. ETF investors earned 9.5% against their funds’ 11.2%, a wider gap than in traditional funds, which fits the idea that a product you can sell in a second is one you are more likely to sell.1 The size of the gap is debated — some researchers argue it overstates what bad timing costs, and our article on common investing mistakes sets out both sides — but nobody finds that investors in aggregate earn more than their funds.
The investor’s chief problem — and even his worst enemy — is likely to be himself.
Daniel Kahneman and Amos Tversky’s prospect theory starts from an observation about people, not markets: losses loom larger than equal gains. A 2024 meta-analysis of 607 estimates from 150 studies put the average loss-aversion coefficient at 1.955 — a loss weighs roughly twice as much as a gain of the same size.3
Robin Greenwood and Andrei Shleifer compared six different measures of investors’ expectations, drawn from surveys, from 1963 to 2011. All six moved together, all rose after markets had done well — and all were strongly negatively correlated with model-based estimates of the returns markets would actually deliver.4 People expect most when prices are already high, and least when they are low.
Brad Barber and Terrance Odean studied 66,465 households at a US discount broker from 1991 to 1996. The average household turned over 75% of its portfolio a year and earned 16.4% a year, while the market returned 17.9%. The fifth of households that traded most earned 11.4%.2 A follow-up study of more than 35,000 households found that men traded 45% more than women, and that trading cut men’s net returns by 2.65 percentage points a year against 1.72 for women.5
Yearly return of US households trading shares directly, 1991–96, against the market
| Annual return | |
|---|---|
| The market | 17.9% |
| The average household | 16.4% |
| The most active fifth of households | 11.4% |
The same habit is visible today in derivatives. India’s market regulator found that nearly 91% of individual traders in equity futures and options made a net loss in the 2024–25 financial year, as in the year before.6
Investors everywhere hold far more of their own country’s shares than its weight in the world. Canadians kept about 50% of their equities at home in 2024, roughly 18 times Canada’s 2.7% share of global markets.7 Vanguard found that, in each developed market it studied, volatility fell most with between 35% and 55% of equities held abroad.8
The newest example is in Morningstar’s own data. When US spot bitcoin ETFs launched in January 2024, money poured in. Through the end of 2025 the average dollar in them gained about 22% a year, nearly 14 percentage points a year less than the ETFs themselves; by the end of June 2026, after a downturn and redemptions that locked in losses, Morningstar estimated the average dollar had lost around 5.8% a year.1 The products were not the problem. The timing of the crowd was.
Terrance Odean examined trading records for 10,000 accounts at a US discount broker and found a strong preference for selling shares that had risen over shares that had fallen. Rebalancing and trading costs did not explain it, the shares people kept went on to do no better than the ones they sold, and in taxable accounts the habit lowered after-tax returns — except in December, when investors did sell losers for the tax loss.9
Richard Thaler described how people sort money into mental accounts with their own rules — salary, bonus, gifts, “safe” money and “play” money — and treat a unit of currency differently depending on its label. Used deliberately, labels help households save, as how to save more shows. Used without noticing, they cost money: a bonus treated as free to gamble, a deposit earning little while a card balance charges far more, a fallen holding kept because selling would “make the loss real”.
A couple has an advantage a single investor lacks: a second person who is not having the same bad day. Biases are hard to see in yourself and easy to see in someone else. The trick is to agree the rules in advance, so that stopping a decision is following a rule rather than criticising a partner.
None of this needs agreement on everything. How couples can talk about money covers the conversation itself; the rules here are what keep a frightening week from becoming a permanent decision.
It is the difference between what a fund returns and what its investors earn, caused by when they buy and sell. Morningstar estimates US fund investors earned 8.7% a year over the ten years to 2025 against 9.9% for their funds.1
The tendency to feel a loss more strongly than a gain of the same size. A 2024 meta-analysis of 607 estimates put the average loss-aversion coefficient at about 1.96, so a loss weighs roughly twice as much as an equal gain.3
In the best-known study, yes: among 66,465 US households from 1991 to 1996, the most active fifth earned 11.4% a year against 17.9% for the market.2
The habit of selling investments that have risen while holding on to ones that have fallen. Terrance Odean’s study of 10,000 brokerage accounts found it was not justified by later performance and lowered after-tax returns.9
Agree rules on a calm day: a written mix and rebalancing date, a threshold above which both must agree, a waiting period before any change, and a small personal allowance each for ideas the other does not share.
In the US, the UK, Canada, Singapore and Australia, roughly half of adults have no will. Money then moves by three routes: joint ownership, a name on the account, or a will — and where there is no will, a fixed legal order that may not match your wishes. Families with assets in more than one country need a plan for each, and everyone needs a family file that says what exists and where.
In most households one person knows where everything is. Readiness means your partner knows four things too — what you own and owe, where each is held, who to call, and what the plan is — plus the paperwork that makes it usable: a will, up-to-date nominations or beneficiaries, insurance details and a way into the accounts. The easiest time to share all of it is now, when nothing is wrong.
Most families have this conversation too late, in a hospital corridor. Asked early, it comes down to six things — what comes in, what is saved, what is owed, what cover exists, where the papers are and what your parents would want — plus a power of attorney signed while they are well, a watch for scams, and an agreed split of support between siblings that also fits inside your own plan.
This is general information, not financial, tax or legal advice for your circumstances. Rules and figures change; check the official source for your country, and consult a licensed professional before making financial decisions. Projections are estimates, not predictions.
