Morningstar publishes an annual “Mind the Gap” study to show the difference between the returns delivered by all funds and ETFs versus the returns actually realized to investors’ accounts. So, for the 10 years ending Dec. 31, 2022, all funds put together (large cap funds, small cap funds, international funds, etc.) had an average return of 7.7% for investors who were fully invested the entire time. However, individual investors (on average) who invested in these funds only earned a 6% return over that same time period. You might ask, “What causes the gap to occur?” The answer: market timing.

Investors who attempt to outsmart the market, bet on a gut feeling about the market’s direction, or get out of the market because of an upcoming event are the “market timers.” Those investors, over the last 10 years, underperformed by 1.7% per year (on average).

How can you close the gap? Simply stay invested. There are inevitable dips and bumps and drops along the way. Nothing is certain and that is part of the investment journey. But if you want to capture the big returns of the market (when they do occur) you have to be invested and not sitting on the sidelines.

See the full Morningstar study here: https://www.morningstar.com/funds/bad-timing-cost-investors-one-fifth-their-funds-returns

Disclaimer: Past performance is not indicative of future results. Investments may lose value.

Posted in 20s, 30s, 40s, 50s, 60s, 70s

Leave a Comment