Bad Timing Cost Fund Investors 15% Of Gains Over Past Decade, Morningstar Says Investors have had trouble navigating the ups and downs of the market, the research firm found.

 

Bad Timing Cost Fund Investors 15% Of Gains Over Past Decade, Morningstar Says

Investors have had trouble navigating the ups and downs of the market, the research firm found.

By Steven Orlowski, CFP, CNPR
Date: 05/24/2025

Over the past decade, mutual fund and exchange-traded fund (ETF) investors have left a significant amount of money on the table—not because of poor fund performance, but because of poor timing.

A new report from Morningstar reveals that the average investor earned returns that were 15% lower than the average fund’s published performance from 2014 through 2023. The culprit? Suboptimal buying and selling decisions driven by emotional reactions to market volatility, not long-term discipline.

The “Behavior Gap” Costs Investors Dearly

Morningstar’s study highlights what financial professionals often refer to as the “behavior gap”—the difference between investment returns and investor returns. While funds themselves posted respectable long-term gains, individual investors often bought in after rallies and sold out during downturns, effectively sabotaging their own returns.

Over the 10-year period analyzed, the average fund posted a 6.4% annualized return. However, the typical investor only captured about 5.4%. That one-percentage-point difference compounded over a decade means investors captured just 85% of the returns their funds delivered—equivalent to missing out on roughly 15% of potential gains.

“The average investor continues to struggle with market timing,” said Russel Kinnel, Morningstar’s director of manager research. “They chase performance, jumping into funds after big gains and bailing when volatility strikes.”

Chasing Heat, Fleeing Pain

The report found that investors often poured money into high-performing sectors—like technology and growth stocks—after strong runs, only to suffer when those areas cooled. Conversely, they pulled money from funds during periods of stress, such as the sharp selloffs in late 2018 and early 2020, only to miss rebounds.

This pattern of buying high and selling low leads to what Morningstar calls “investor return drag”—and it’s not limited to retail investors. Even institutional and professional investors are not immune to these behavioral pitfalls.

Active vs. Passive: A Surprise Twist

Interestingly, the study found that investors in active funds fared worse than those in passive index funds. This contradicts some assumptions that professional management can help investors navigate volatility better. In practice, actively managed funds were more susceptible to investor missteps, possibly because investors expect quicker action and greater responsiveness from these funds—and are more prone to react if those expectations aren’t met.

By contrast, investors in passive index funds, especially those in diversified, low-cost vehicles like total market or target-date funds, tended to stay put longer. This hands-off approach helped reduce the timing gap.

What Can Investors Do?

The Morningstar report underscores the importance of long-term discipline, diversification, and resisting the urge to time the market. Financial advisors often stress the value of sticking to a plan—especially during turbulent periods when the temptation to act emotionally is greatest.

“Success in investing doesn’t come from reacting to the news cycle,” said Kinnel. “It comes from patience, perspective, and consistency.”

To that end, Morningstar recommends that investors:

• Adopt a long-term mindset. Avoid reacting to short-term market movements.

• Automate investing. Use tools like dollar-cost averaging and retirement plan contributions to stay consistent.

• Limit performance-chasing. Evaluate funds on risk-adjusted returns and long-term suitability—not just recent performance.

• Work with an advisor. A good advisor can serve as a behavioral coach, helping investors stay focused on their goals.

Conclusion

While the past decade has rewarded patient investors, Morningstar’s findings serve as a cautionary tale. Timing the market—even with the best of intentions—can quietly erode returns over time. For investors seeking to maximize gains, sometimes the best action is no action at all.