15 October 2025

At The Money: Don’t Underperform Your Own Investments!

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 1

Myth Buster04:49

A Strong Fund Track Record May Not Mean Investor Profits

Investors often add money only after a fund has enjoyed a strong run and attracted attention. If performance then reverses and they leave, their dollar-weighted experience can lag the fund's published record; selling just before performance improves creates the same problem in reverse.

Cash can arrive after a strong performance run.
Investors may exit when the subsequent performance rolls over.
The pattern is economically equivalent to buying high and selling low.
Selling before an improvement can also reduce captured returns.

“Schematically they're buying high end selling low.”
Jeffrey Pattak · 05:39

“it's chasing behavior where investors pile in just as you describe after a fund goes in a strong run, only for performance to roll over,…”
Jeffrey Pattak · 05:47

#return chasing#buy high sell low#investor behavior#fund performance

Explainer· 3

Explainer01:26

Investor Timing Cost About 15% of Aggregate Fund Returns

Morningstar defines the investor return gap as the difference between a fund's stated total return and the return investors experience after the timing and size of cash flows are considered. For the ten years ending December 31, 2024, the estimated gap was 1.2 percentage points per year, equivalent to about 15% of aggregate total returns.

The measure compares estimated investor returns with funds' stated total returns.
Investor returns incorporate the timing and magnitude of cash flows.
The ten-year annual gap was 1.2 percentage points.
The shortfall represented about 15% of aggregate total returns.

“the investor return gap is the difference between our estimate of the average return of a funder or a group of funds and that funds.…”
Jeffrey Pattak · 01:28

“the timing and magnitude of cash flows basically cost investors around fifteen percent of their aggregate total returns.”
Jeffrey Pattak · 02:21

#investor returns#behavior gap#morningstar#cash flows

Explainer02:49

How Morningstar Calculates the Investor Return Gap

Morningstar uses a calculation akin to an internal rate of return. It combines beginning assets, 120 monthly net flows, and ending assets to derive the constant return that reconciles the opening and closing values after cash flows.

The method resembles an internal rate of return estimate.
It pools U.S. open-end fund and ETF assets.
The calculation includes 120 monthly net flows for the ten-year period.
The data comes from assets and flows reported to Morningstar.

“It's akin to an internal rate of return. Estimate.”
Jeffrey Pattak · 02:49

“We dump all of that into a calculation that derives essentially the concert return that would reconcile the beginning assets to the ending assets after…”
Jeffrey Pattak · 03:07

#return calculation#internal rate of return#fund flows#morningstar

Explainer03:56

Total Return Can Hide the Effect of Investor Decisions

A time-weighted return, commonly presented as total return, assumes one initial lump sum stays invested throughout the period. A dollar-weighted return instead reflects when investors bought or sold and how much they moved, exposing the effect of their actual cash-flow decisions.

Published fund performance commonly uses time-weighted returns.
Time-weighted returns assume an initial lump-sum investment remains untouched.
Dollar-weighted returns incorporate the timing and magnitude of purchases and sales.
Comparing the two reveals the effect of investor cash-flow behavior.

“a time weighted return. It assumes an initial lump sum investments that's left untouched until the end of the period.”
Jeffrey Pattak · 04:23

“a dollar weighted return that takes the timing and magnitude of investors purchases and sales into account.”
Jeffrey Pattak · 04:32

#time-weighted returns#dollar-weighted returns#total return#performance measurement

Takeaway· 3

Takeaway03:26

The Study Covered 26,000 Funds and $25 Trillion

The analysis includes U.S. open-end mutual funds and ETFs but excludes closed-end funds. About 26,000 individual funds and ETFs held roughly $25 trillion by the end of the study period, making the dataset broad across the two included vehicle types.

U.S. open-end mutual funds are included.
ETFs are included.
Closed-end funds are excluded.
The dataset covered about 26,000 funds and ETFs with roughly $25 trillion in assets.

“It encompasses US open end mutual funds as well as ets. It wouldn't include things like closed end funds.”
Jeffrey Pattak · 03:35

“there were around twenty six thousand individual funds and ETFs that together held around twenty five trillion dollars in assets by the end of our…”
Jeffrey Pattak · 03:41

#mutual funds#etfs#fund research#study scope

Takeaway07:15

Sector Funds and ETFs Produced Some of the Widest Gaps

Sector equity funds had a 1.5-percentage-point annual gap and investors missed about 20% of their aggregate returns. ETFs showed a 1.7-point annual gap, equivalent to about 18% of total returns, while traditional open-end funds had a narrower 1.2-point gap.

Sector equity funds had a 1.5-percentage-point annual gap.
Sector-fund investors failed to capture about 20% of aggregate returns.
The ETF annual gap was about 1.7 percentage points.
Traditional open-end funds had a 1.2-percentage-point annual gap.

“Sector equity funds have chronically suffered the widest gaps in absolute terms.”
Jeffrey Pattak · 07:18

“ETFs had wider gaps than traditional open end funds.”
Jeffrey Pattak · 07:53

#sector funds#etfs#open-end funds#return gap

Takeaway09:03

Volatility Makes Funds Harder for Investors to Use

Morningstar found the pattern at both market and asset-class levels: volatility prompts investors to change holdings, often to their detriment. Within the same asset class, more volatile funds produced wider investor return gaps than more sedate counterparts.

Market fluctuations increase the likelihood that investors change holdings.
Those changes can hurt dollar-weighted returns.
The relationship appears within asset classes as well as at the broad market level.
Hotter-to-handle funds showed wider gaps than less volatile peers.

“market fluctuations do tend to push investors buttons. They're much likelyer to make changes to their holdings and this can work to their detriment and…”
Jeffrey Pattak · 09:26

“volatility pushes investors' buttons, and when it does so, they tend to capture less of their funds total returns.”
Jeffrey Pattak · 10:12

#volatility#investor behavior#asset classes#return gap