behavior gap
The difference between a fund's return and the average return its investors actually got, caused by when they bought and sold.
The behavior gap is the difference between the return a fund earned and the return its investors actually got. The fund's return assumes someone bought at the start and held to the end (a time-weighted return). Real people add money, take it out and switch, so their own result (a money-weighted return) depends on when their money was in. If they buy after a rise and sell after a fall, they earn less than the fund they owned.
The gap isn't a fee and doesn't appear on any statement, which is why it's easy to miss. It comes from ordinary reactions: selling in a drawdown, waiting for things to "calm down" before buying back, moving money into whatever went up last. A few such moves in one bad year can cost more than decades of fund fees.
For an investing product, the behavior gap is a design metric: an app can shrink it with automatic monthly contributions, a written plan and fewer prompts to act during a fall. For a person investing alone, a simple rule decided in advance does the same job.
Example
In Zapas's closed beta, 200 users held the same fictional world fund through one volatile year. The fund returned 8.7% (time-weighted) with a 22% fall along the way; the average user earned 6.0% (money-weighted). That's a behavior gap of 2.7 percentage points.
The 52 users who sold in the drop averaged −6.8%, while those who stayed averaged 10.5%. Across the cohort, the timing of deposits and sales cost about $85,000 compared with everyone simply holding. Synthetic data, for learning only.
Common mistakes
- Comparing your result with the fund's return without accounting for when you added money.
- Treating the gap as bad luck rather than the result of buy and sell decisions.
- Selling in a fall and waiting for "certainty" before buying back.
- Measuring an investing app only by fund returns and ignoring what users actually earn.
Learn it in the course
- The behavior gap: fund return vs user return · Why the average user earns less than the fund they hold, and who sold at the bottom.