The behavioural gap — real UK data
A fund’s published return assumes you invested at the start and held throughout. Investors who add and withdraw money at different times can earn more or less than that. The difference is often called the “behavioural gap”. This page explains how it is measured, what Morningstar’s studies found for UK and US investors, why the UK figures are smaller than often claimed, and what the arithmetic of a gap means over 30 years.
What the behavioural gap measures
There are two ways of measuring a fund’s return.
Time-weighted return
This is the return published on factsheets. It shows what one pound invested at the start of the period and left untouched would have earned, so it is not affected by when investors put money in or took it out.
Money-weighted (investor) return
This takes account of the timing and size of money flowing in and out. If a lot of money arrives just before a fall, or leaves just before a rise, the average pound invested earns less than the fund’s published return.
The gap
The difference between the two is the gap. When investors on average buy after rises and sell after falls, their money-weighted return is below the time-weighted return. When they invest steadily, or buy after falls, it can be above it. Studies such as Morningstar’s estimate the gap from monthly fund assets and returns, so they measure the average investor in a group of funds, not any individual.
What Morningstar has found
Morningstar’s “Mind the Gap” studies are the most widely cited source.
- US, 2025 study: over the ten years to the end of 2024, the average dollar invested in US mutual funds and ETFs earned 7.0% a year, about 1.2 percentage points a year less than the funds’ aggregate total return of 8.2%. Morningstar found larger gaps in funds whose cash flows were more volatile, a sign of more trading.
- Global study, published December 2019: covering seven markets over rolling five-year periods to 2018 (ten-year periods in the US), Morningstar found that the investor return gap in the UK had turned positive, at +0.27 percentage points a year, with allocation, equity and alternative funds all giving investors higher returns than the funds’ total returns. The comparable figures were a gap of 0.53 points against investors in the largest continental European fund markets, 0.45 points against US investors, and +0.65 points in favour of Australian investors, whose superannuation system involves steady contributions.
Morningstar’s explanation was that investors did best where systematic, regular investing was common and worst in volatile markets, and that gaps were smaller for low-cost and low-volatility funds.
Two points follow. First, the gap is not a fixed cost: it varies by market, period and type of fund, and in some periods UK investors as a whole have done slightly better than their funds. Second, headline claims that UK investors routinely lose 1–2% a year to behaviour are not supported by the UK figures Morningstar has published; the larger gaps come mainly from the US and from volatile fund types.
Other studies
DALBAR’s long-running Quantitative Analysis of Investor Behavior, based on US fund flows, reports much larger gaps. Its method has been criticised, partly because it compares investors’ returns with an index over a fixed period in a way that can overstate the effect of the timing of regular contributions. Because of that debate, and because it covers US investors, this page does not rely on its figures.
What drives a gap
1. Buying after strong performance
Money tends to flow into funds and sectors after they have done well. See the recency bias guide.
2. Selling after falls
Loss aversion makes falls feel especially painful, which can prompt selling near a low point. See the loss aversion guide.
3. Following popular themes
Investor interest in a theme often peaks after a strong run, and thematic funds are frequently launched at that point.
4. Frequent changes
Each switch carries costs, such as dealing charges and spreads, and another chance of mistiming.
UK context
The UK features that Morningstar associated with smaller gaps are relevant here. Most workplace pension savers contribute automatically each month and stay in their scheme’s default fund, and many ISA investors use regular monthly plans. Regular contributions spread purchases over time, which reduces the effect of any one badly timed decision. The gap is more likely to matter for investors who make large, irregular decisions in volatile funds.
What a gap means over 30 years
This is arithmetic, not a forecast. It assumes £500 a month for 30 years (£180,000 in total), a fund return of 7% a year before charges, a fund charge of 0.14% a year, and monthly compounding. Only the size of the gap changes.
No gap
- Net return: 7% − 0.14% = 6.86% a year
- Value after 30 years: about £593,400
A 1.2 percentage point gap (the size of the US gap in Morningstar’s 2025 study)
- Net return: 5.66% a year
- Value after 30 years: about £470,800
A 2 percentage point gap
- Net return: 4.86% a year
- Value after 30 years: about £405,500
Comparison
| Gap a year | Total paid in | Value after 30 years | Difference from no gap |
|---|---|---|---|
| None | £180,000 | £593,400 | — |
| 0.3 points | £180,000 | £559,600 | £33,800 |
| 1.2 points | £180,000 | £470,800 | £122,600 |
| 2 points | £180,000 | £405,500 | £187,900 |
Small annual differences compound into large sums over decades, which is why even a modest gap matters. The table shows the size of the effect for a given gap; it does not show how large any particular investor’s gap will be.
Approaches associated with smaller gaps
Morningstar’s findings point to a few features associated with smaller gaps or better investor outcomes:
1. Regular, automatic contributions
Investors in markets and plans with automatic contributions had the best results. A monthly direct debit into the same funds means fewer decisions made in response to markets.
2. Fewer, simpler holdings
A small number of broad funds needs fewer decisions than a long list of specialist funds.
3. Less frequent checking
Market data shows why frequent checking can be unsettling. For the US share market from 1996 to 2025, calculated from Kenneth French’s data, about 45% of trading days, 35% of months and 20% of calendar years had negative returns. The more often a portfolio is checked, the more falls are seen, even when the long-run trend is up.
4. Rules decided in advance
A written plan setting out the target mix, when to rebalance and what would justify a change can be followed when markets are volatile.
5. Lower-cost, lower-volatility funds
Morningstar found smaller gaps for low-cost and low-volatility funds in most major markets, and multi-asset (allocation) funds often had small or positive gaps.
6. Advice or guidance
A regulated adviser can help some investors stick to a plan, at a cost. Pension Wise, from MoneyHelper, offers free guidance on defined contribution pensions to people over 50.
7. Less reaction to news
Much daily market news has little bearing on long-term outcomes, and reacting to it is one route to mistimed decisions.
Questions for a yearly review
- How many changes were made this year, and what prompted each one: recent performance, news, or a change in circumstances?
- Was anything sold after a fall, or bought after a sharp rise?
- How often was the portfolio checked?
- Would the portfolio be better or worse off without the changes made?
Frequently asked questions
Is the behavioural gap the same as fees?
No. Charges are deducted inside the fund and are already reflected in its published (time-weighted) return. The gap is the further difference caused by the timing of investors’ money going in and out. The two add together in what investors actually receive.
Can investors have a positive gap?
Yes. In Morningstar’s 2019 global study, UK and Australian investors as a whole earned more than their funds’ published returns over the periods studied. Steady contributions, or adding money after falls, can produce that result.
Does the gap apply to workplace pensions?
Less often. Most workplace pension savers contribute automatically every month and do not change funds, which is the pattern associated with small or positive gaps. The risk is greater where investors make frequent, large decisions themselves.
How can someone measure their own gap?
By comparing their own money-weighted return, which depends on the dates and amounts of their contributions and withdrawals, with the time-weighted returns of the funds they held over the same period. Many platforms show a personal rate of return that can be used for this.
What causes the largest gaps?
Morningstar associates the largest gaps with volatile funds and with periods around sharp market reversals, such as 2008–09, when some investors sold near the bottom and missed the rebound.
Sources
- Morningstar press release — “Mind the Gap” global study, 12 December 2019 (UK, Europe, US, Australia figures)
- Morningstar — Mind the Gap US 2025
- Kenneth R. French — Data Library (US market daily, monthly and annual returns)
Related guides
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