Phil Van Ostrand, MBA

The more you trade, the less you make. @MorningstarInc today published its annual “Mind the Gap” report, which measures the gap between how mutual funds and ETFs are performing, and what investors are actually getting. That “gap” is very real. Most reports of total returns assume an investor made a lump-sum investment and then sat on it for the whole period. But that’s not what many investors really do. They pull money out. They put money in. They try to time the markets. And that creates a “gap” in the returns investors actually see. Here’s the headline number: Morningstar examined 23,000 individual mutual funds and ETFs from 2016 through 2025. The average annual total return invested in US mutual funds and ETFs over the 10 years ended Dec. 31, 2025 was 9.9%, assuming a lump-sum purchase. Fair enough. That is consistent with most long-term studies of overall returns. Here’s the second headline number: the average dollar invested in US mutual funds and ETFs earned 8.7% per year over the same 10-year period. That’s about 1.2 percentage points per year less than these funds’ 9.9% aggregate annual total return. That 1.2-percentage point difference is what Morningstar calls the “investor return gap.” Put simply, fund investors underperformed the funds aggregate total return by almost 12%. How can there be such a gap between the total returns and the results of individual investors? Put simply, investors didn’t just buy their investments and do nothing. They traded, they tried to time the markets, and that cost them. Morningstar says it is due to “the timing and magnitude of investors’ purchases and sales of fund shares during the 10-year period.” Holders of U.S. Equity funds had a much narrower “performance gap” It’s not just when investors bought and sold. Certain types of investments had much bigger “investment gaps” than others. While there was on overall “investment gap” of 1.2 percentage points, investors in US equity funds did much better, with an “investment gap” of only 0.4 percentage points, where investors in Alternative, International Equity, and Taxable Bond funds generally fared worse. Investor gap Overall: 1.2% U.S. Equity: 0.4% Alternative: 1.6% International equity: 1.1% Taxable bond: 1.0% Source: Morningstar Why did holders of U.S. equity funds have a narrower “performance gap?” There were narrower timing gaps in the U.S. equity funds. This may be because many of these funds are held in a retirement plan, where there may be less incentives to trade. On the other hand, the authors noted that investors in Alternative funds “have chronically suffered from larger timing gaps.” Why? Other than the greater volatility of these funds, the authors note they are less likely to be featured on retirement plan menus, and “are more likely to be used on an ad-hoc or standalone basis, which could lead to timing errors.” This is a polite way of saying that if investors are presented with less opportunities to trade risky and more volatile funds, they’ll probably do better. It’s more nuanced than just bad market timing Morningstar is careful not to blame the entire gap on excessive trading and market timing. For example, they noted that even “laudable” practices like investing a portion of every paycheck in the market, or even regular rebalancing, can also be a factor in the gap between total returns and the results of individual investors. “Given that nuance, it’s not advisable to view this study’s findings as a parable of “dumb money” or definitive proof of individual investors’ fallibility,” the authors state. Again, fair enough, but there are some inescapable conclusions from this mountain of data. I’ll say it, if they don’t: avoid excessive trading and market timing While Morningstar is typically careful in not entirely blaming excessive trading and market timing as the sole reason for the “performance gap,” it’s core conclusions clearly support the long-held belief that investors should avoid excessive trading and market timing, outside of rebalancing needs. Stand-alone and core options, like broadly diversified U.S. equity funds, had narrower gaps than specialized strategies like thematic and alternative funds. The obvious takeaway: “Favor fewer, more widely diversified funds, including those that automate routine tasks like rebalancing, and hold the line on transacting, mechanizing trades to the extent possible.” ETFs and trading: The ease at which ETFs can be bought and sold during the trading day was one of the reasons Vanguard’s founder, Jack Bogle, had issues with ETFs. To Bogle, it simply increased the temptation to trade and time the markets, which almost invariably led to underperformance, in his opinion. Morningstar echoes this sentiment: “When it comes to ETFs, avoid the temptation to transact, despite the advantage such vehicles boast as trading vehicles.” Like S&P Global’s SPIVA study, which examines the performance of active fund managers against their benchmarks, Morningstar’s annual “Mind the Gap” study is an important contribution to investor education. While not explicitly stated, anyone who has been reading these studies for decades, as I have, can only come to one conclusion: the keys to creating long-term, get-rich-slow wealth are diversification, an emphasis on low-cost funds, resisting the urge to trade and time markets, and the patience to allow compounding and reinvesting returns to work their magic. assets.contentstack.io/v3/as… bobpisani.substack.com/p/the…