The Biggest Threat to Your Returns Is Usually the Person Holding the Account
Behavioral Finance
Investors tend to earn less than the funds they own, and the gap opens at exactly the moments that feel most urgent to act.
By Lifeway Financial · June 10, 2026 · Updated July 21, 2026 · 4 min read
Why do investors earn less than the funds they own?
Because money tends to arrive after strong performance and leave after weak performance. Influential prospect-theory research found that losses often weigh more heavily than equivalent gains, though the magnitude varies by person and setting and is not a universal constant, so the moments that feel most urgent to act are the moments when acting costs the most.
Key takeaways
The behavior gap comes from the timing of contributions and withdrawals, not from the fund itself.
Losses often weigh more heavily than equivalent gains in prospect-theory research, with a magnitude that varies rather than a fixed multiple, and education does not remove the effect.
Decisions made in advance and in writing outperform willpower during a decline.
A stated policy, scheduled rebalancing, and adequate cash reserves prevent forced selling.
An adviser's most valuable role is process discipline, not prediction.
Studies of investor behavior consistently find a gap between what a fund returned and what the average investor in that fund actually earned. The fund did not change. The timing of money going in and coming out did.
The gap has a simple mechanism. Money arrives after a run of good performance and leaves after a stretch of bad performance, which is the opposite of what the math requires.
Why it is so hard to avoid
In their work on prospect theory, Kahneman and Tversky found that losses tend to weigh more heavily than equivalent gains, with the loss aversion coefficient in their experimental estimates falling in a range of roughly two. That figure comes from laboratory settings and varies by person and situation, so treat it as a description of a tendency rather than a fixed multiplier. The asymmetry itself is not a character flaw and it does not go away with education or net worth. It means a falling market generates real pressure to act, and acting almost always means selling.
The moments that feel most urgent are the moments when the cost of acting is highest. That is the whole problem in one sentence.
Structure beats willpower
Nobody talks themselves out of loss aversion in the middle of a decline. What works is deciding in advance, in writing, while nothing is happening. A stated investment policy. Rebalancing on a schedule rather than on a feeling. Enough cash reserve that a withdrawal never forces a sale at a bad price. An agreed answer to the question of what we will do the next time markets fall twenty percent, written before they do.
What an adviser is actually for
Not prediction. The useful role is being the person who does not change the plan on a Tuesday because of a headline, and who can say, with the file open, that this was anticipated and here is what we said we would do.
A disciplined process is unglamorous by design. It is also the part of the work most likely to change the outcome.
Common questions
Frequently asked questions
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The difference between what a fund returned and what the average investor in that fund actually earned, created by buying after gains and selling after losses.
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Decide in advance while nothing is happening: a written investment policy, rebalancing on a schedule rather than a feeling, enough cash that a withdrawal never forces a sale, and an agreed plan for the next twenty percent decline.
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Not by predicting markets. The measurable contribution is keeping a sound plan in place through the moments when changing it feels most urgent.
Sources and further reading
Where these figures come from
Rules, thresholds, and figures change. Confirm current details with the primary source for the year you are planning.
Prospect Theory: An Analysis of Decision under Risk
Kahneman and Tversky, Econometrica
Advances in Prospect Theory: Cumulative Representation of Uncertainty
Tversky and Kahneman, Journal of Risk and Uncertainty
Mind the Gap: Investor Returns Study
Morningstar
Insights are educational and are not investment, tax, or legal advice. See our Form ADV Part 2A and Form CRS for important details.
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