Investing term

What is Behavior gap?

The difference between a fund's reported return and what its investors actually earned — usually worse.

The behavior gap is the difference between the return a fund reports and the return its investors actually earn — and it's usually negative. It opens up because people buy after a fund has already run up and sell after it has fallen, so their real-money timing lags the fund's published numbers. The gap is the measurable cost of chasing performance.

For example

A fund returns 8% a year, but investors who piled in at the top and bailed at the bottom earn just 5% — the 3-point shortfall is the behavior gap.

Behavior gap is taught hands-on in Stage 2 — Why Investing Matters (And When It Doesn't).

See the lesson →

Related terms

Asset classA broad category of investment with similar behavior. Stocks, bonds, cash, real estate, commodities.Dollar-cost averagingInvesting a fixed amount on a fixed schedule, regardless of market level.FOMO buyingFear of missing out — piling into something after it has already run, because everyone else seems to be winning.Loss aversionFeeling losses about twice as strongly as equivalent gains — leading you to hold losers far too long.
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