Pure Benchmarks · Guide
What Is the Behavior Gap, and How Big Is Mine?
Short answer
The behavior gap is the difference between the return an investment produces and the return investors in it actually earn, caused by when they buy and sell. Financial planner Carl Richards popularised the term. DALBAR’s Quantitative Analysis of Investor Behavior has measured it for decades; for 2024 it found average equity fund investors trailed the market by 848 basis points, and that investors guessed market direction correctly only 25% of the time, a record low. The industry figure is an average. Your own gap can be measured by comparing your actual result with the portfolio you would have had without your trades.
A fund can return 10% a year while the average person who owned it earns much less, because money tends to arrive after strong periods and leave after weak ones. That shortfall has a name, the behavior gap, and it is one of the most consistently measured findings in investor research. This page explains what the behavior gap is, what drives it, how large it has been, and how to find out whether it applies to your own portfolio.
Investment return versus investor return
An investment’s time-weighted return measures what one dollar held the whole time would have earned. Investor return, a money-weighted measure, reflects when real people added and withdrew money. If investors pile in after a rally and sell after a drop, their money is invested at the worst times, and investor return falls below investment return. The difference is the behavior gap.
How large the gap has been
DALBAR’s annual Quantitative Analysis of Investor Behavior compares average investor returns with market returns. For 2024 it reported that the average equity fund investor trailed the S&P 500 by 848 basis points, and that investors guessed the market’s direction correctly only 25% of the time, the lowest in the study’s history. The size of the gap varies year to year, but it has been persistent across decades of data.
What causes it
The usual drivers are selling after declines, buying after strong runs, frequent switching between funds, and moving to cash when markets feel uncertain. JP Morgan Asset Management found that missing just 10 of the best trading days over 20 years cut a $10,000 investment from $71,750 to $32,871, and those best days often arrive close to the worst ones, when nervous investors are most likely to be out.
The average is not yours
Industry figures describe the average investor. Some people trade rarely and have almost no gap; others trade often and have a large one, positive or negative. The only way to know your own is to measure it: compare what your portfolio actually earned with what the same holdings would have earned if you had not traded.
Measuring your own behavior gap
Pure Benchmarks, our own product, measures this from linked accounts. Its Decision Benchmark freezes your portfolio before each buy or sell and runs that do-nothing version forward on real prices, so the sum of your decisions shows whether your behavior added to or subtracted from what your holdings earned. It also ranks your portfolio against verified investors in the same risk category.
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See Your Free Benchmark ReportFrequently asked questions
What is the behavior gap?
It is the difference between what an investment returns and what investors in it actually earn, caused by the timing of their buying and selling.
Who coined the term behavior gap?
Financial planner Carl Richards popularised it, and DALBAR’s investor behaviour research has measured the effect for decades.
How big is the behavior gap?
DALBAR reported that for 2024 the average equity fund investor trailed the S&P 500 by 848 basis points. The size varies by year and by investor.
How do I calculate my own behavior gap?
Compare your actual portfolio’s result, with deposits and withdrawals removed, against the portfolio you would have had without your trades over the same dates. Pure Benchmarks, our own product, automates this from linked accounts.
How can I reduce my behavior gap?
Common approaches include fewer, pre-planned changes, written rules for when you will buy or sell, and measuring each decision so you can see its effect. This page is information for comparison and not a recommendation about any holding.
Keep exploring
- What Is a Buy-and-Hold Counterfactual Portfolio?
- Panic Selling: What It Actually Cost Your Portfolio
- How to Make Investment Decisions Without Letting Emotion Take Over
- Did My Trading Beat Buy and Hold?
- What Is a Decision Benchmark?
- What Is Outcome Bias, and How Does It Distort My Investment Decisions?
- How Do I Review My Past Investment Decisions?
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This page is an information baseline for comparison only. It is not investment advice and not a recommendation to buy, sell, replace, or transfer any specific asset, account, or firm. Past performance does not guarantee future results. All figures shown are illustrative.