By Jonathon Tainsh
Each year, Morningstar, one of the world’s most respected investment research firms, publishes a report called Mind the Gap.
The key message from this year’s report is both simple and important:
Most investors earn less than the investments they own.
What does Morningstar mean by “the gap”?
Morningstar’s latest report shows that over the 10 years to 31 December 2024, the average investor earned around 7.0% per year, while the underlying funds they invested in delivered closer to 8.2% per year.
That difference — around 1.2% per year — is what Morningstar refers to as the investor return gap.
Over time, this gap compounds. Morningstar estimates it represents roughly 15% of total returns lost, not because the investments were poor, but because of how and when investors moved their money.
Importantly, this gap has shown up consistently, across different market conditions — strong markets, weak markets, and periods of high uncertainty.
💡 Risk disclaimer: Ensure you seek financial advice before making superannuation adjustments, as changes can impact tax obligations and long-term financial security.
Why does this gap occur?
The most common reason is timing.
Investors often:
- Add money after markets have already risen
- Reduce or exit investments after markets have fallen
In other words, they tend to buy when confidence is high and sell when fear is highest.
But Morningstar’s research shows the issue goes beyond simple “buy high, sell low”.
The gap tends to widen when investors:
- Make frequent changes to their portfolios
- Move in and out of investments during volatile periods
- Allocate to strategies that experience sharp ups and downs
- Feel compelled to “do something” during periods of uncertainty
Morningstar summarises it bluntly:
The more investors traded, the less they made.
The role of investor behaviour
These patterns are not unusual — they are deeply human.
Some common behavioural tendencies include:
Loss aversion
Losses feel more painful than gains feel rewarding. This can lead investors to sell during market declines to avoid further discomfort, even when long-term prospects remain sound.
Focusing on recent events
What has just happened often feels more important than long-term history. Strong recent performance can create overconfidence, while short-term declines can feel permanent.
Overconfidence during strong markets
When markets perform well, it’s easy to believe outcomes are predictable and that timing decisions will add value.
The urge to take action
During volatile periods, doing nothing can feel irresponsible — even though unnecessary changes are often the most damaging decisions.
Morningstar’s data shows these behaviours are not isolated mistakes. They are systematic patterns that repeatedly reduce investor outcomes over time.
Why good investments alone aren’t enough
One of the more surprising findings from Morningstar’s research is that low-cost or passive investments do not automatically protect investors from this gap.
Even investors using broadly diversified, low-fee funds experienced a shortfall if they moved in and out at the wrong times.
Similarly, investments that fluctuate more sharply — even if they perform well over the long run — tend to be harder for investors to stick with, increasing the likelihood of poorly timed decisions.
The key takeaway is this:
The biggest risk to long-term returns is not markets themselves, but how investors react to them.
Evidence from Australia tells a similar story
This is not just a US phenomenon.
Australian research examining more than 13,000 members of a large industry superannuation fund found that members who switched investment options during the COVID period were, on average, 5.6% worse off than those who stayed invested.
The intention was understandable — reducing risk during uncertainty — but the outcome was lower long-term returns.
What consistently improves outcomes
Across decades of data, a small number of principles consistently lead to better investor outcomes:
- An appropriate asset allocation
Your mix of growth assets (such as shares) and defensive assets (such as cash and fixed interest) should reflect your goals, timeframe, and comfort with market ups and downs. - Proper diversification
Diversification reduces reliance on any single investment or market and helps smooth the investment journey. - Disciplined portfolio management
Structures that reduce the need for frequent decision-making — such as systematic rebalancing and long-term investment frameworks — help limit emotional reactions. - Staying invested
Remaining invested through market cycles is one of the most important contributors to long-term success.
The real message from Morningstar
The Mind the Gap report is not a criticism of investors. It is a reminder that investing is as much about behaviour and discipline as it is about markets and returns.
Market volatility is inevitable.
Periods of uncertainty will always occur.
The temptation to react will always exist.
A well-constructed investment strategy — supported by professional advice — is designed not to predict markets, but to help investors stay the course when it matters most.
If you have questions
If you have any questions about this article, your investment strategy, or how your portfolio is positioned for long-term success, please contact the People+Partners Wealth Management team.
Disclaimer
People + Partners Wealth Management Pty Ltd ABN 67 127 250 613 is a Corporate Authorised Representative of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357 306. The content above is for general information only and does not constitute personal financial advice. It does not take into account your individual objectives, financial situation, or needs.
