You could be losing out on 15% of your mutual fund and ETF returns, researchers say—how to keep more of your money

Morningstar's 2025 "Mind the Gap" study reveals that over the 10 years ending December 2024, the average dollar invested in U.S. mutual funds and ETFs returned an annualized 7%, significantly underperforming the funds' average return of 8.2%, creating a 1.2 percentage-point "investor return gap." This disparity is primarily attributed to investor behavioral biases, such as buying high and selling low, and is more pronounced in volatile funds, where the gap reached 2% compared to 0.4% for less volatile funds. The research suggests that deliberate, hands-off investment strategies, like those employed with allocation funds which exhibited a minimal 0.1% gap, can effectively mitigate this behavioral-driven underperformance.

Analysis

Morningstar's 2025 "Mind the Gap" study reveals a significant investor return gap, with the average dollar invested in U.S. mutual funds and ETFs returning an annualized 7% over the 10 years ending December 2024. This contrasts sharply with the funds' average return of 8.2% over the same period, indicating a 1.2 percentage-point underperformance for investors. This behavioral gap effectively cost investors approximately 15% of their potential returns.

Jeffrey Ptak of Morningstar Research Services attributes this gap primarily to investor behavior, specifically "buying high and selling low" during market extremes. The study further highlights that this underperformance is exacerbated by fund volatility; investors in the most volatile quintile of funds experienced a 2% gap, significantly wider than the 0.4% gap observed in the least volatile funds. This suggests a psychological tendency to panic-sell volatile assets, preventing investors from realizing potential risk premiums.

To narrow this gap, Morningstar's data supports deliberate, hands-off investment strategies. Allocation funds, particularly target-date funds held in long-term retirement accounts, demonstrated the lowest investor gap at just 0.1 percentage point. Automating trading and maintaining a diversified portfolio are recommended to mitigate emotional decision-making and reduce transactional activity.

Key Decisions for Investors

• Investors should assess the volatility of their current fund holdings, especially those with high turnover or concentrated positions, as highly volatile funds correlate with larger investor return gaps.
• Consider increasing allocations to diversified, low-cost funds like target-date or allocation funds, and automate contributions to foster a disciplined, hands-off approach and minimize behavioral biases.
• Emphasize a buy-and-hold strategy and avoid market timing, as emotional reactions to market fluctuations are a primary driver of underperformance, even in theoretically high-return assets.