Last year was a disaster in the markets across all asset classes. Unfortunately, the average mutual-fund investor fared even worse than market indexes would have predicted. This phenomenon is known as the “return gap” or “investor gap.” This gap captures the difference between the average return for a mutual fund and what an average investor in that fund actually earns. A mutual fund’s stated return will reflect the average return of its stock or bond holdings over a period, assuming an investor puts in a lump sum of money and leaves it alone. But because investors on average tend to move in and out of investments and often at the wrong time—such as selling when the market has already hit a bottom and buying back in when the market is at the top—they often don’t experience this stated return in full. Thus, what investors on average are actually experiencing in the fund is better captured by its asset-weighted return, a measure that gives more weight to returns when there is more money in the fund, and less weight to returns when there is less money in the fund. The first interesting finding is that in general, the return gap for an investor is worse in down years than up years. For instance, for small-cap equities the average return gap in down years is 1.19 percentage points and the average return gap in up years is 0.76 percentage point. This means that the average investor does 0.43 percentage point more damage to a small-cap portfolio in down years versus up years due to poor market timing. The three exceptions to this finding, according to our research, were: fixed income, emerging markets and value equity. As it turns out, for these asset classes, up years actually have higher return gaps than down years. As for market volatility, high-volatility years have higher return gaps than low-volatility years across all asset classes. Volatility seems to induce poor decisions in investors—people tend to get spooked at the bottom and abandon their positions, and then enter back into the positions when the market has already rebounded. The biggest gap was found in funds focused on value stocks, which are those perceived to be trading at a lower price relative to their fundamentals. The average value equity fund has a return gap of 1.46 percentage points in high-volatility years—the biggest gap we identified in our study—and a return gap of 0.58 during low-volatility years. This means the average investor loses an extra 0.88 percentage point in high-volatility years in a value equity portfolio.