The Hidden Truth About Your Investment Returns: Why They’re Probably Lower Than You Expect

Your investment returns may not be as high as you think they are.

That’s according to a new report from research firm Morningstar, which found a gap between how much mutual funds and exchange-traded funds (ETFs) generate and how much investors actually see in their portfolios.

The Gap Between Total Returns and Investor Returns

Say you’re researching a new fund to buy. If you go to the fund’s information page — like Fidelity Investment’s detailed page about the Fidelity Total Market Index Fund, for example — you’ll see “total returns” for how that fund performed over different periods of time. But Morningstar’s report shows that while the average total return across all funds was 7.3% over the decade ending Dec. 31, 2023, the actual investor return was just 6.3%.

Why Investors Aren’t Capturing Total Returns

The reason investors aren’t actually seeing their funds’ total returns comes down to bad timing.

Total market returns don’t take buying and selling into account — moves that many investors are bound to make over a decade. Instead, total returns illustrate the performance of a hypothetical investor who bought a fund and held it for the full 10 years.

How to Avoid the Gap and Capture the Highest Returns

There are ways to avoid a big difference between how much your fund generates and how much of that return you actually see. One, as you might expect, is to avoid rapidly trading and trying to time the market. But another is to focus on simple investing strategies, like to buy shares in target-risk funds, which hold a mix of stocks and bonds to meet a certain level of risk, and target-date funds, which adjust their holdings overtime so you take on more risk when you’re younger and less when you’re older.

Additional Tips

“Less is more,” Ptak says. “Investors succeed in capturing more of their funds’ total returns when they’re using simpler strategies.”

If you’re hoping to avoid a big gap between total returns and investor returns, Ptak also recommends refraining from buying shares in volatile funds, like sector-specific investments. While sector-specific stock funds certainly give you more diversification than individual stocks, they’re still at the mercy of headwinds that hit that entire sector, so they provide much less diversification than something like a fund that replicates the entire U.S. stock market, for example.