The usual explanation for why everyday investors trail the market is that they pick badly. They chase hot stocks, back the wrong funds, and miss the next great company. It is a comforting story, because it implies the fix is better research.
The data tells a less flattering story. When researchers take the returns of the funds people actually own and compare them with what those people earned, the shortfall has little to do with what was bought. It has to do with when it was bought, and when it was sold.
The gap between the fund and the investor
Morningstar has measured this for nearly two decades in its annual Mind the Gap study. The 2026 edition, authored by Jeffrey Ptak, tracked the average dollar invested in close to 23,000 US mutual funds and ETFs over the 10 years that ended December 31, 2025. The funds themselves returned 9.9 percent a year. The average dollar invested in them earned 8.7 percent.
That 1.2 percentage point difference amounts to roughly 12 percent of the funds' total return, and it comes entirely from the timing and size of investors' purchases and sales. A fund's published return assumes you owned it from the first day to the last. Investors do not behave that way. Money tends to arrive after a fund has done well and leave after it has done badly, so more dollars are exposed to the weak stretches and fewer to the strong ones. The dollar-weighted return captures that behavior, and it is almost always lower.
In dollar terms, the number is large. Eligible funds held $13.6 trillion on January 1, 2016. Left untouched and compounding at 9.9 percent, that money would have grown to nearly $35 trillion. Instead the funds held $29.7 trillion at the end of 2025, a shortfall Morningstar estimates at about $3.8 trillion.
The finding is not new. The 2025 edition found the same size of gap, with investors earning 7.0 percent a year against 8.2 percent for the funds over the decade ending in 2024. The edition before that, covering the decade through 2023, put the figures at 6.3 percent and 7.3 percent, and it singled out 2020 as a year of especially heavy timing costs, with a one-year gap of 2.0 percentage points. That was the year of the pandemic crash and the rebound that followed.
Where the gap shrinks and where it grows
The gap is not spread evenly, and the pattern is revealing. Investors in US stock funds captured 12.8 percent a year against the funds' 13.3 percent, a difference of less than a percentage point. In the large-blend category, the anchor of many diversified portfolios, one industry account put the gap at essentially zero, with the average dollar earning about 14.0 percent, in line with the funds themselves. Allocation funds, which bundle stocks and bonds into a single product, showed a gap of 0.7 points.
Then look at the other end. Alternative funds lost 1.6 points a year to investor behavior, sector equity funds lost 1.2, and municipal bond funds lost 1.1. Morningstar also found that volatility mattered far more than fees. The gap was 0.4 points for the least volatile funds and 2.1 points for the most volatile. ETFs, which trade all day and are easy to buy and sell, showed wider gaps than traditional open-end funds. Crypto ETFs had the widest gap in the study, while buffer ETFs, which are designed to limit losses, helped curb timing mistakes.
The through line is simple. The more a product invites a reaction, the more investors react, and the more they give up. Ptak's own summary of the research is that the less trading investors do, the more of their funds' returns they tend to keep.
Thirty years of the same story
Academics were documenting this long before Morningstar put a trillion-dollar figure on it. In a widely cited 2000 paper in The Journal of Finance, Brad Barber and Terrance Odean studied 66,465 households with accounts at a large discount broker between 1991 and 1996. The average household earned 16.4 percent a year and turned over 75 percent of its portfolio annually. The households that traded the most earned 11.4 percent, while the market returned 17.9 percent.
The split within their sample is striking. Households with monthly turnover above 8.8 percent earned 11.4 percent net, while those that traded infrequently earned 18.5 percent. Before costs, the frequent traders and infrequent traders performed about the same. It was the trading itself, and the costs and mistakes that came with it, that did the damage. Barber and Odean's explanation was overconfidence, and their paper's conclusion was blunt enough to make the title: trading is hazardous to your wealth.
The news cycle is doing the picking
A second finding from the same researchers helps explain the "when" part of the problem. In a 2008 paper in The Review of Financial Studies, Barber and Odean showed that individual investors are net buyers of attention-grabbing stocks: stocks in the news, stocks with unusually heavy trading volume, and stocks with extreme one-day returns.
Their reasoning is practical rather than moralizing. A person choosing what to buy faces thousands of possible stocks and cannot research them all, so the ones that catch attention become the shortlist. Selling is different, because people can only sell what they already own. The result is a lopsided pattern in which headlines and price spikes steer purchases. The study covered more than 66,000 investors at one large discount brokerage, 647,000 at a large retail brokerage, and 14,000 accounts at a small discount broker, and it compared them with 43 professional money managers, who showed less of the pattern.
An earlier Odean study from 1999 found that the stocks investors at a large discount brokerage bought underperformed the stocks they sold, even before transaction costs. Put the two findings together and the picture is uncomfortable: the news decides what gets bought, and what gets bought tends to lag what gets dumped.
The best days live next to the worst days
The cost of reacting to bad news is easiest to see in the market's own calendar. J.P. Morgan Asset Management has tracked this for years in its Guide to Retirement. In its analysis of the S&P 500 from 2005 through 2024, seven of the 10 best days occurred within two weeks of the 10 worst days. The pattern showed up vividly in 2020, when March 12 was the second-worst day of the year and the very next day was the second-best.
The dollar impact is large. An investor who put $10,000 in the S&P 500 at the start of 2005 and stayed put through 2024 ended with $71,750, according to the firm's figures as reported by CNBC. Missing just the 10 best days cut that to $32,871, a 6.1 percent annual return. Missing the 60 best days produced a negative return and a balance of $4,712.
It is fair to be skeptical of charts like this, because they show what you lose by missing the best days without showing what you would save by dodging the worst. But the clustering is the point. Because the biggest rallies and the biggest drops arrive together, an investor who sells in the panic usually misses the rebound too. The moment when selling feels most urgent is the moment when the next big up day is most likely to be close.
A fair objection
The size of the timing penalty is not settled. In a paper published in May 2026 in the Financial Analysts Journal, Jon Fulkerson, Bradford Jordan, Timothy Riley, and Qing Yan challenged how the Morningstar gap is interpreted. Their own replication found a gap of a similar size, 1.4 percentage points against Morningstar's 1.2. But they argue that, using the same sample, poor timing accounts for only 0.10 percentage points a year. In other words, they accept that investors earn less than their funds, and dispute how much of that difference reflects bad timing.
That debate matters, and readers should hold the $3.8 trillion figure with some humility. It does not rescue the broader argument against frequent trading, though. The 2000 Barber and Odean results stand on their own, and even in the Morningstar data the gap is smallest in exactly the places where investors have the least reason to make decisions.
What it means in practice
None of this is personalized financial advice, but the research points in a consistent direction. The gaps are narrowest for investors in broad, diversified funds and for those who set up automatic contributions and leave them alone. Ptak's takeaway is the same: automate what you can, keep it diversified, and trade less. The gaps are widest in volatile, narrow, and easily traded products, where every headline offers a reason to act.
A few habits follow naturally. Decide in advance what would make you change your plan, so that a scary news day is not the moment you invent the rules. Treat a sudden urge to buy something because it is all over the news as a signal to slow down, since that is the exact behavior the attention research describes. And check your accounts less often, since every look is another chance to react.
The calendar that hurts investors is not the one on the wall. It is the one they build themselves, out of good weeks they chase and bad weeks they flee. The research suggests the cure is dull, and that it works largely because it is dull. The investors who capture the most of what the market gives are usually the ones who gave themselves the fewest opportunities to interfere.
