Sometimes a fund will show a great return, but the individual investor’s own return on their investment doesn’t match up. 10 years ago Carl Richards coined the term “behavior gap” to describe this discrepancy in his book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, and an article in Morningstar researches how to bridge the gap.

The behavior gap arises when there’s a “difference between the rate of return an investment produces in a certain amount of time, and the rate of return that investors actually earn on that investment,” the article explains. Those two sets of returns are nearly always different, with many factors contributing to the gap: market timing, buying or selling based on recent performance, chasing a trend, or selling off during a downturn, all of which can damage a portfolio.

In their research, the Morningstar team looked at the 3-year return on a pharmaceutical fund through April of this year. The fund returned 23%, but investors’ average return was 17%. In this instance, investors were chasing the trend in pharmaceuticals popularized during the pandemic, and likely entered too late or sold off too quickly when they didn’t see returns. Instead of chasing trends, “have an investment thesis when buying,” the article suggests. Ask yourself why you’re buying this particular stock or fund, how it fits into your portfolio, and what’s your strategy for getting out if it doesn’t do well.

Another segment of Morningstar’s research found that in a 10-year study, only 6 months contributed to a fund’s general outperformance over its benchmark. If an investor missed out on those 6 months, they underperformed the benchmark. While it’s impossible to time the market precisely, avoid moving too fast in and out of funds so you don’t miss out on crucial months. One way to facilitate this is to automate your investments, lessening the ability to act out of emotion rather than rationale.

Lastly, the Morningstar team found that no fund performs to its best year after year. Funds are cyclical and will have years of outperformance and underperformance depending on its strategy. Don’t exit when the fund is down; rather, focus on long-term goals and recognize that the market will eventually rebound. The behavior gap is driven by an investor’s own behavior, which often matters more than skill, the article concludes.