The Investment Performance Gap We Don’t Talk About

As part of our ongoing professional development and learning, we attend various events and training sessions throughout the year.

During the last week of September, the Everlake team attended the annual PortfolioMetrix investment forum. There’s always a fantastic line up of speakers at this event and this year the discussion focussed on various aspects of behavioural finance and how human nature impacts financial planning and investing so deeply.

The Behaviour Gap

In this article, we’re exploring this subject further, and looking at why the stated return on your investment fund and the return you personally experience are rarely the same.

The difference, known as the behaviour gap, often comes down to timing, emotion and decision-making. We look at why this gap exists, what drives it and how thoughtful financial planning helps to narrow it.

Factsheet v Reality

When you read a fund factsheet, the past performance figures look reassuringly precise. Maybe it’s 4% or 12% but it’s presented as fact and looks clean, certain and reassuring.

But the return per the fund factsheet and the one you actually experience are rarely identical.

To explain this, we need to look at two aspects – the two ways that fund performance can be measured and the impact of emotions on investing.

Measurement of Fund Performance

First, fund performance can be measured in two main ways:

Time-weighted return (TWR) – the number shown on the factsheet. It measures how the fund itself performed, ignoring money being taken out or put in.

Money-weighted return (MWR) – the return you see on your own statement which is heavily influenced by your behaviour. It reflects the fund performance plus when you invested, when you withdrew funds and how much you added along the way.

In a world where no one ever touched their portfolio, these two figures would be the same. But that’s not how real investors generally behave.

Money goes in and out, often in response to market headlines, fear, or excitement, and this is where things diverge. So that brings us to the second element – when emotion meeting investing.

Behavioural finance studies repeatedly show that investors tend to buy high and sell low. Morningstar’s Mind the Gap study, updated annually, finds that the typical investor underperforms the very funds they invest in.

Why? Because real investors aren’t robots and are influenced by emotion, noise and timing.

When markets rise, optimism builds and investors add money. When markets fall, fear takes over and many sell. Over time, these decisions can shave off one or two percentage points a year. This sounds small, but compounded over decades, can reduce long-term wealth dramatically.

The Hype Trap

Consider what happened with clean energy investments during 2020. The iShares Global Clean Energy ETF soared 140% that year as the theme captured attention. Investors rushed in, doubling the fund’s size by early 2021, just before it started to fall.

Over five years, the fund itself returned around 17% per year (TWR), but the average investor in the fund lost roughly 3% per year (MWR). The difference (nearly 20%) was driven by poor timing, not by poor management.

We see this pattern repeatedly with trendy or thematic funds, from artificial intelligence to crypto to tech bubbles. The stronger the story, the more likely it is to pull investors in at the wrong time.

Who’s Responsible for the Gap?

Traditionally, the industry says fund managers are responsible for the TWR or how the fund performed and investors bear responsibility for the MWR.

In reality however, the line isn’t so clear.

If a fund is marketed on its past performance or hyped-up themes, it’s no surprise that investors pile in late and get burned. You could argue that part of the responsibility lies with how investments are designed and communicated.

That’s why at Everlake, we believe in focusing on portfolio design and investor behaviour together.

Good investing isn’t about picking winners, it’s about aligning portfolios with real goals and temperaments, so investors can stay the course through different market cycles.

Bridging the Gap

The behaviour gap isn’t inevitable. It can be narrowed with the following:

• Diversification – avoiding portfolios dominated by single themes or sectors.
• Planning – having a long-term framework that focuses on outcomes, not market noise.
• Composure – understanding your risk comfort zone and sticking with it.
• Guidance – working with an adviser who helps you make steady, rational decisions even when markets aren’t.

A well-constructed portfolio may not lead the performance tables every year, but it’s more likely to deliver consistent returns that align with your financial goals, which is what matters most.

Conclusion

The gap between fund performance and investor experience highlights a truth we see every day, good financial outcomes depend as much on behaviour as on ‘investment skill’.

Our role as advisers is to help you bridge that gap, not by chasing what’s hot, but by understanding your goals, and building discipline, diversification and trust into your financial plan.