If You’ve Ever Lost Money in the Stock Market, Read This: The Hidden Gap That Left Ordinary Investors 8.5% Behind the Market in a Single Year
It usually happens on an ordinary evening.
You open your brokerage app, or the year-end statement arrives, and you do the sum you've been avoiding. The news all year said the market had a great run. So why does your account look so... ordinary?
You didn't pick a disaster stock. You didn't fall for a scam. You bought decent funds. And still, somewhere between "the market went up 25%" and "my account went up," a big piece of the money simply vanished.
Here's the plain answer. In 2024 the S&P 500 returned 25.02%, but the average equity fund investor earned just 16.54%, a gap of 8.48 percentage points, according to DALBAR's annual investor behavior study. Over 20 years the gap was smaller but still costly: about 9.24% a year for the average investor versus 10.35% for the S&P 500. The cause wasn't the market. It was the timing of when ordinary people bought and sold.
That missing slice has a name: the behavior gap. And the good news is that, unlike the market, it's the one part of investing you control completely.
The short answer: The average investor earns less than the S&P 500 because of when they buy and sell, not because of what they buy. DALBAR measured an 8.48-point gap in 2024, a 0.72-point gap in 2025, and about 1.1 points a year over 20 years. Morningstar's independent method finds investors trail their own funds by about 1.2 points a year. Over a lifetime, that can cost six figures. |
In This Article
The Year Ordinary Investors Left 8.5% on the Table
Let's make the 2024 number real.
Put $100,000 in an S&P 500 index fund on January 1, 2024, and leave it alone. By December 31 it's worth about $125,020.
Now give the same $100,000 to the "average equity fund investor" in DALBAR's study, the composite of millions of real people buying and selling real mutual funds. They end the year with about $116,540.
Same year. Same market. Often the same funds. $8,480 gone. No bill ever arrives for it, so most people never know they paid it.
DALBAR called the 848-basis-point lag the second-largest investor gap of the past decade. Only 2021 was worse, at 10.32 points.
What happened? DALBAR's own explanation is blunt: it wasn't market performance that held investors back in 2024, it was behavior. Investors pulled money out of equity funds in every single quarter of the year, and the biggest withdrawals came just before a major surge in returns.
Read that again, slowly. The money left right before the market paid out.
That isn't stupidity. It's being human. When prices wobble, your brain screams "protect what's left." When the market has already run, it whispers "get in before you miss more." Both feel like wisdom in the moment. Together, they're a machine for buying high and selling low.
If you've ever sold in a panic and then watched the market climb without you, you already know this feeling. We go deeper into it in Why Smart, Hard-Working People Sell at the Very Bottom.
Then 2025 Happened, and the Gap Nearly Closed. Here's the Catch
Here's something most articles about this keyword won't tell you, because they were written before the newest numbers came out.
In DALBAR's 2026 study, released in April 2026, the S&P 500 returned 17.88% in 2025 and the average equity investor earned 17.16%. The gap shrank to just 0.72 points, the third-smallest since 1985 and the lowest since 2012.
So is the problem solved? Not quite. Look at how wildly the gap swings from one year to the next:
Three things are worth knowing about that "good" 2025:
People were still running for the exits. DALBAR reported equity withdrawals of 6.91% of assets for the year, which it called elevated, including a record 2.30% pulled out in July 2025 alone.
Bond investors did worse, not better. The average fixed income investor earned 2.41% while the Bloomberg U.S. Aggregate Bond Index returned 7.30%, a gap of 4.89 points.
One calm year proves little. In 2023 the gap was 5.50 points. In 2024 it was 8.48. A single good year is like one sober weekend. It's a start, not a cure.
The lesson isn't "investors are hopeless." It's that the gap is a habit. It shows up when markets get scary or exciting, and it shrinks when people stay put. That's exactly why you can fix it.
The Long View: 20 and 30 Years of Investor Returns
Single years are noisy. What matters for your retirement is the long run.
Here's what DALBAR's 2025 study shows over longer periods to December 31, 2024:
Measure | Average equity fund investor | S&P 500 | Gap per year |
|---|---|---|---|
1 year (2024) | 16.54% | 25.02% | 8.48 pts |
20 years (2005-2024) | 9.24% | 10.35% | 1.11 pts |
30 years (1995-2024) | 10.05% | 10.92% | 0.87 pts |
A gap of "only" one point a year sounds harmless. It isn't. Compounding works on the gap just as it works on your returns.
Over 20 years, $100,000 growing at 10.35% becomes about $716,880. At 9.24% it becomes about $585,644. That's $131,236 less, roughly the price of several years of retirement, lost to timing alone.
A second opinion: Morningstar's "Mind the Gap"
You shouldn't trust any single study, so here's an independent one with a different method.
Every year Morningstar compares the returns funds report with what the average dollar invested in them actually earned. In its 2026 edition, covering the 10 years to December 31, 2025, the average dollar in U.S. mutual funds and ETFs earned 8.7% a year, while the funds themselves returned 9.9%. That's a gap of about 1.2 points a year, or roughly 12% of the funds' total return.
In dollars, Morningstar estimates the $29.7 trillion these funds held at the end of 2025 is about $3.8 trillion less than it would have been if investors had simply left their money alone.
Two different firms, two different methods, the same conclusion: ordinary investors keep less than the investments they own.
The Honest Part: Is DALBAR Exaggerating?
If you've lost money before, you've been sold to before. So you deserve the full picture, including the criticism.
DALBAR's numbers are quoted everywhere, often by people selling financial advice. And some respected experts say its method makes the gap look bigger than it really is.
Retirement researcher Wade Pfau argued in 2017 that DALBAR's calculations were wrong and urged the advice industry to stop using the study as a sales tool. Economist Michael Edesess and his co-authors argued that DALBAR's approach can make a perfectly sensible investor, one who simply adds money every year, look like a bad market timer.
Here's the core of the debate in plain English:
A fund's official return assumes you put in one lump sum on day one and never touched it. This is called the time-weighted return.
Your real return depends on when you added or withdrew money. This is the dollar-weighted (or money-weighted) return.
If you invest steadily from every paycheck, your dollar-weighted return can differ from the fund's official return even if you never made a single emotional decision. That isn't "bad behavior." It's just arithmetic.
DALBAR's CEO, Louis Harvey, has defended the study, saying it measures the real investor experience, including the cost of sitting in cash, sales charges and fees, and not just market-timing mistakes.
So what can you safely believe?
What the evidence supports: Morningstar uses the textbook dollar-weighted method critics recommend, and it still finds investors trail their own funds by roughly 1 to 2 points a year over rolling 10-year periods. The gap is real. In calm years it's modest. In wild years, when fear and greed take over, it can jump far higher. That's the version of the truth we'll work with. |
The 5 Leaks That Drain the Average Investor
The gap isn't one mistake. It's a handful of small leaks that drip quietly for decades. Here they are, from the biggest to the sneakiest.
Leak No. 1: Selling after the fall, buying after the rise
This is the big one, and it's exactly what DALBAR saw in 2024: money leaving in every quarter, with the heaviest outflows right before the surge.
The pattern runs like a loop. Prices rise, excitement builds, money pours in near the top. Prices fall, fear builds, money flows out near the bottom. Then the market recovers without you.
If this loop has caught you before, our guide to what calm investors do after a 20% drop gives you a plan for the next time.
Leak No. 2: Missing the handful of days that do most of the work
Here's a fact that changes how you see every scary headline.
Wells Fargo Investment Institute studied the S&P 500 (price index, excluding dividends) from July 1995 to June 2025. Staying fully invested earned 8.45% a year. Miss just the 10 best days out of roughly 7,500 trading days, and that fell to 5.56%. Miss the 30 best days, and it fell to 2.07%, below the 2.5% average inflation rate.
And here's the cruel twist: the best days hide right next to the worst ones. In Wells Fargo's data, three of the 30 best days and five of the 30 worst days all happened within eight trading days, from March 9 to March 18, 2020. J.P. Morgan Asset Management found the same pattern over 20 years: seven of the 10 best days came within two weeks of one of the 10 worst days.
In other words, the person who sells to "wait until things calm down" almost always misses the rebound. By the time it feels safe, the best days have already happened.
Leak No. 3: Chasing last year's winner
Meet the best stock fund of the 2000s.
Ken Heebner's CGM Focus Fund gained about 18% a year in the decade to 2009, a decade when the S&P 500 went nowhere. The Wall Street Journal crowned it the best U.S. stock fund of the decade.
Yet according to Morningstar, the typical CGM Focus shareholder lost about 11% a year over the same 10 years.
How? The fund surged 80% in 2007. Investors poured $2.6 billion into it in 2008, just in time for a 48% drop. Then they pulled more than $750 million out in 2009, before the recovery.
The best fund of the decade. Investors in it lost money. That's the behavior gap at its most brutal.
It's not ancient history. Morningstar estimates that Ark Investment's funds, led by the ARK Innovation ETF, wiped out about $14.3 billion of shareholder value in the 10 years to December 31, 2023, after attracting huge inflows in 2020 and 2021 following a spectacular run. Most of that money arrived after the best returns had already happened.
Leak No. 4: Trading too much
In one of the most famous studies in finance, "Trading Is Hazardous to Your Wealth," professors Brad Barber and Terrance Odean studied 66,465 households at a large U.S. discount broker from 1991 to 1996.
The households that traded the most earned 11.4% a year. The market returned 17.9%.
Their stock picks weren't the problem. Their gross returns were close to the market's. The costs of trading, and the act of trading itself, did the damage. If you recognize yourself here, read why most day traders lose money.
Leak No. 5: Paying someone to try to beat the index
Many investors own actively managed funds whose managers try to beat the market. Most fail, especially after fees.
In S&P Dow Jones Indices' SPIVA research, 79% of active large-cap U.S. stock funds underperformed the S&P 500 in 2025. In Canada the picture was even worse: in 2025, 93.4% of Canadian equity funds trailed the S&P/TSX Composite, which climbed 31.7% while those funds averaged about 22%.
Add a 1% annual fee on top, and you've built a second gap on top of the behavior gap. Here's how much a "tiny" 1% fee really costs over 30 years, and what 20 years of stock picking vs the S&P 500 really shows.
The Strangest Number in the Whole Study
Here's a detail that turns everything upside down.
According to DALBAR figures summarized by Wells Fargo, investors "guessed right" about the market's direction at least half the time in 12 of the past 21 years.
More often right than wrong. And still behind.
How is that possible? Because being right about direction on an ordinary month earns you a little. Being wrong during the handful of explosive rebound days costs you a lot. You can win most small bets and still lose the game if you lose the few big ones.
That's why "I'll just be careful and get out when it looks bad" doesn't work, even for smart people. The math isn't on your side. We cover the mental traps behind this in Why Smart People Lose Money in the Stock Market.
There's one more number worth knowing: DALBAR put the average equity fund investor's retention period in 2024 at 4.79 years. Less than five years. The stock market's biggest rewards usually take longer than that to show up, and our look at whether the S&P 500 has ever lost money over 20 years shows why patience matters so much.
Who Actually Closes the Gap
Now for the hopeful part. Some investors capture almost all of their funds' returns. Here's what Morningstar found in its 2026 study, for the 10 years to December 31, 2025:
U.S. stock fund investors did remarkably well: the average dollar earned about 12.8% a year versus the funds' 13.3%. Morningstar's headline called it history-making.
Allocation fund investors (all-in-one funds that hold stocks and bonds and rebalance for you, including target-date funds) had one of the smallest gaps, about 0.7 points.
Index fund investors earned about 10.3% a year with a gap of about 1.1 points. Active fund investors earned about 7.5%, trailing their funds by about 1.6 points.
The exciting stuff did worst. Investors in spot bitcoin ETFs trailed those funds' returns by roughly 14 points a year from their January 2024 launch to the end of 2025.
Morningstar has found the same pattern year after year: the more volatile a fund, and the more its investors traded in and out, the bigger the gap.
The pattern in one line: Boring, broad, low-cost and automatic closes the gap. Exciting, narrow, expensive and hands-on widens it. |
That's why so many burned investors rebuild with a simple setup. If you're starting over, our plain-English guide to index funds for people who've been burned is a good place to begin.
What the Gap Costs in Real Dollars
Let's put this in terms you can feel. This is a hypothetical example, not a forecast.
Imagine two investors, both 40 years old, each investing $500 a month for 25 years.
Investor A buys an S&P 500 index fund, automates the deposits and never sells in a panic. Suppose they earn 10.35% a year, the S&P 500's 20-year return in DALBAR's study.
Investor B invests the same $500 a month but jumps in and out with the headlines. Suppose they earn 9.24% a year, the average investor's 20-year return in the same study.
After 25 years | Investor A (10.35%) | Investor B (9.24%) |
|---|---|---|
Total put in | $150,000 | $150,000 |
Ending value (approx.) | $656,000 | $553,000 |
Difference | About $103,000 less |
Same savings habit. Same market. The only difference is roughly one point a year lost to timing, and it costs Investor B about $103,000 by age 65.
And remember, in years like 2021 and 2024 the gap wasn't one point. It was eight to ten. Want to see what steady monthly investing can grow into? See what $500 a month in an S&P 500 index fund becomes after 10, 20 and 30 years.
The 7 Rules That Close the Gap
You can't control the market. You can control the gap. These seven rules are simple, but none of them are easy, which is exactly why they work.
Rule No. 1: Know your own number
Most people have no idea what return they personally earned. They know what the market did and assume they got it.
Look for a "personal rate of return" or "money-weighted return" figure in your brokerage account. If there isn't one, list every deposit and withdrawal with its date in a spreadsheet and use the XIRR function. Compare your number with what your funds returned over the same period. That difference is your personal behavior gap.
Rule No. 2: Automate your investing
Set a fixed amount to go in on the same day every month, whatever the headlines say. Automation removes the decision, and the decision is where the gap lives. If you're deciding how to put a lump sum back in after a loss, read lump sum or monthly after a big loss.
Rule No. 3: Own the whole market, cheaply
A broad, low-cost index fund removes two leaks at once: the fee leak and the "my manager picked the wrong stocks" leak. If you live outside the United States, here's how to invest in the S&P 500 from anywhere.
Rule No. 4: Pick a mix you can hold through a 50% crash
The best portfolio on paper is useless if you sell it at the bottom. If a 50% drop in an all-stock portfolio would make you sell, hold some bonds or an all-in-one allocation fund instead. Morningstar's data shows those investors keep more of their returns. A simple option is the lazy 3-fund portfolio.
Rule No. 5: Write your rules down before the storm
On a calm day, write one page: what you own, why you own it, and what you'll do when the market falls 20%, 30% or 50%. (Hint: usually nothing, or buy more.) Sign it. When the crash comes, you follow the page, not your stomach.
Rule No. 6: Look less often
The more often you check, the more often you see a loss, and the more often you're tempted to act. Checking quarterly, or even just when you rebalance once a year, is plenty for a long-term investor.
Rule No. 7: Use a 72-hour cooling-off rule
Before you sell anything in a falling market, wait 72 hours and walk through the flowchart below. Most panic sells don't survive three days of calm thinking.
Quick checklist before any sell order: Did my reason for owning this change, or just the price? Do I need this money within the next 3 to 5 years? Am I reacting to a headline? Have I waited 72 hours? Would I be comfortable explaining this decision to myself in 10 years? |
What to Do Tonight
You don't need to fix everything at once. Do these three things before you go to bed:
Find your personal rate of return in your brokerage account (or note where to find it). Write it next to what your main fund returned. Don't judge yourself. Just look.
Set up, or check, one automatic monthly contribution. Even a small amount turns you from a market timer into a market owner.
Write the first line of your one-page plan: "When the market falls, I will..." and finish the sentence on a calm night, not a scary one.
If you want to go further, Jack Bogle spent his whole life fighting the behavior gap. His 10 rules for investors who are tired of losing money are worth an evening.
Frequently Asked Questions
What is the average investor return compared with the S&P 500?
According to DALBAR, the average equity fund investor earned 16.54% in 2024 versus the S&P 500's 25.02%, and 17.16% versus 17.88% in 2025. Over the 20 years to 2024, the average investor earned about 9.24% a year versus 10.35% for the S&P 500.
Why does the average investor underperform the S&P 500?
Mostly because of timing: buying after markets rise, selling after they fall, and missing the few strong rebound days that follow big drops. Higher fees, frequent trading and chasing hot funds add to the gap. The investments themselves usually aren't the main problem.
What is the behavior gap in investing?
The behavior gap is the difference between what an investment returns and what the average investor in it actually earns. It comes from the timing and size of purchases and sales. Morningstar estimates it at about 1.2 percentage points a year for U.S. funds over the decade to 2025.
Is the DALBAR study accurate?
It's widely quoted but debated. Critics such as Wade Pfau and Michael Edesess say DALBAR's method can overstate the gap. Morningstar's independent dollar-weighted method still finds a real gap of roughly 1 to 2 points a year, so the direction is right even if exact sizes vary.
What percentage of investors beat the S&P 500?
Few do, and fewer keep doing it. SPIVA found 79% of active U.S. large-cap funds trailed the S&P 500 in 2025, and the share grows over longer periods. Individual investors who trade often do even worse; Barber and Odean found the most active traders earned 11.4% versus the market's 17.9%.
How much does missing the best days in the stock market cost?
A lot. Wells Fargo found that from July 1995 to June 2025, missing the S&P 500's 10 best days cut annual returns from 8.45% to 5.56%, and missing the 30 best days cut them to 2.07%. Many of those best days came within days of the worst ones.
How can I close my own behavior gap?
Automate monthly contributions, own a broad low-cost index fund, choose a stock and bond mix you can hold in a crash, write your rules down in advance, check your account less often, and wait 72 hours before selling in a falling market.
Do index fund investors also have a behavior gap?
Yes, but usually a smaller one. In Morningstar's 2026 study, index fund investors earned about 10.3% a year with a gap of about 1.1 points, while active fund investors earned about 7.5% with a 1.6-point gap. An index fund only helps if you stay in it.
The Gap Was Never Your Fault. Closing It Is Your Choice
If you've lost money in the stock market, here's what the data really says: you're not uniquely bad at this. You're normal. Millions of intelligent, hard-working people did exactly what you did, for exactly the same human reasons.
But now you know where the money goes. Not to a villain. Not to bad luck. To a few predictable moments of fear and excitement that cost ordinary investors 8.48 points in 2024 alone.
The market will keep doing its job. Your job is smaller and simpler: stay in your seat long enough to collect what it pays.
If you want to understand exactly why you lost money before, and the simple system that stops it happening again, I've put everything into a free 38-page report.
Here's what you'll get inside:
The real reasons ordinary investors lose money, and why it usually isn't their fault
The simple, boring approach that quietly beats most professionals
A calm, step-by-step plan to start rebuilding, even after a big loss
About the Author
Stephen Loke has been a student of the market for more than 15 years. He is also an agritourism entrepreneur whose farm has been featured in Bloomberg News and Asahi Shimbun.
This article is general education, not personal financial advice. I'm not a licensed financial adviser, and nothing here is a recommendation to buy or sell any security. Past performance doesn't guarantee future results. Please consider your own situation, or speak with a licensed professional, before making investment decisions.
Sources
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