What DALBAR Really Tells Us

Why investors struggle when markets become uncomfortable, what more than three decades of investor-flow data shows, and what disciplined investors should do differently.

Markets have always been volatile. The headlines change and the reasons change. Sometimes it is inflation. Sometimes it is war, interest rates, recession, banking stress, political uncertainty or technological disruption. Yet despite the changing causes, investor behaviour remains remarkably consistent.

Whenever markets become difficult, investors start asking the same questions: Should I move to cash? Should I reduce risk? Should I wait for things to settle down? Is this time different? Should I be doing something?

These questions are natural. They are also the questions investors have been asking for generations. That is what makes the work of DALBAR so valuable. After more than three decades of research, DALBAR has shown that while markets evolve, human behaviour changes very little. The biggest challenge facing investors is often not the market itself, but their response to it.

The research that changed how we think about investors

DALBAR is an independent US financial-services research firm. Its annual Quantitative Analysis of Investor Behavior, known as QAIB, has been published since 1994 and draws on historical investor-flow data beginning in 1985.

Most investment research asks: “How did the fund or market perform?” DALBAR asks a different question: “What return did the investor actually experience?”

To estimate that experience, DALBAR analyses monthly mutual-fund sales, redemptions and exchanges. It uses those cash flows to calculate the return of the Average Investor and then compares that result with the return of an appropriate market index. A benchmark return assumes the capital remained invested. The investor return is affected by when money was added, removed or switched.

If investors owned investments that generated a particular return, but the investors themselves earned less, the difference reflects the effect of cash-flow timing. This difference is commonly described as the behaviour gap.

DALBAR is therefore not simply measuring investment performance. It is attempting to quantify the difference between the returns investments make available and the returns investors capture.

How the DALBAR data should be interpreted

DALBAR’s figures are aggregate, dollar-weighted estimates based on mutual-fund flows. They do not track the personal circumstances or motivation of every investor. A withdrawal may reflect panic, but it may also fund retirement spending, a house purchase or another legitimate need. The data should not be interpreted as proof that every gap is caused by emotional decision-making.

Even with that qualification, DALBAR’s long history remains valuable. Across different market environments, investor returns have repeatedly differed from market returns. The size of the gap changes, sometimes substantially, but the timing of investor cash flows continues to influence the result investors receive.

What the recent DALBAR data shows

The contrast between 2024 and 2025 helps explain why the research should be examined over long periods rather than through a single annual result.

Period and asset class	Market index return	Average Investor return	Investor gap
2024 equities	25.02%	16.54%	8.48%
2025 equities	17.88%	17.16%	0.72%
2025 fixed income	7.30%	2.41%	4.89%

Source: DALBAR, 2026 QAIB press release. US investor and market data.

In 2024, the S&P 500 returned 25.02%, while DALBAR calculated that the Average Equity Investor earned 16.54%. The resulting shortfall of 8.48 percentage points was the second-largest annual equity investor gap of the previous decade.

The following year was markedly different. In 2025, the S&P 500 returned 17.88% and the Average Equity Investor earned 17.16%. The gap narrowed to 0.72 percentage points, which DALBAR described as the third-smallest gap since 1985 and the lowest since 2012.

That improvement is important. It shows that the behaviour gap is not fixed and that investors do not underperform by the same amount every year. However, DALBAR also reported equity withdrawals equal to 6.91% of assets during 2025, including a record monthly withdrawal rate of 2.30% in July.

The fixed-income result was less favourable. The Average Fixed Income Investor earned 2.41% in 2025, compared with 7.30% for the Bloomberg US Aggregate Bond Index. That produced a gap of 4.89 percentage points.

The correct conclusion is not that investors always fail, nor that the gap is always large. It is that decisions about when money enters and leaves investments can materially change the return ultimately experienced by investors.

The longer-term compounding effect

The annual gap matters because differences in return compound. Over the 20 years to 31 December 2024, DALBAR reported an annualised return of 10.35% for the S&P 500 and 9.24% for the Average Equity Investor. The annual difference was 1.11 percentage points.

Applied to a starting portfolio of $1 million, and assuming no additional cash flows, those two return paths illustrate the scale of the difference:

• At 10.35% a year, $1 million grows to approximately $7.2 million after 20 years.
• At 9.24% a year, $1 million grows to approximately $5.9 million after 20 years.
• The difference is approximately $1.3 million.

This illustration is not a forecast and excludes fees, tax and subsequent contributions or withdrawals. Its purpose is simply to demonstrate that what looks like a modest annual shortfall can become significant when repeated over a long investment horizon.

DALBAR provides the evidence. Behavioural finance provides the explanation.

What investors tend to do, and what they should do instead

DALBAR shows the outcome created by investor cash flows. Behavioural finance helps explain the decisions behind those flows. When conditions become uncomfortable, investors often respond in ways that provide short-term emotional relief but may weaken their long-term financial outcome.

When markets fall

What investors tend to do: Investors tend to focus on the most recent losses, assume the decline will continue and reduce exposure to make the discomfort stop.

What they should do: A disciplined investor returns to the purpose of the portfolio, confirms that near-term cash needs are protected and changes strategy only if goals, circumstances or time horizon have changed.

When markets rise strongly

What investors tend to do: Investors tend to become more confident, increase risk and direct money toward the assets that have recently performed best.

What they should do: A disciplined investor maintains the agreed asset allocation, rebalances where necessary and recognises that strong past performance can reduce rather than increase prospective value.

When uncertainty is high

What investors tend to do: Investors tend to seek certainty by moving to cash or waiting for conditions to feel safer.

What they should do: A disciplined investor accepts that certainty is not available in advance and follows a process determined before the stressful period began.

When everyone else appears to be acting

What investors tend to do: Investors tend to use the crowd as evidence and feel unsafe doing something different.

What they should do: A disciplined investor distinguishes social reassurance from investment evidence and remains anchored to personal goals rather than other people’s portfolios.

When doing nothing feels irresponsible

What investors tend to do: Investors tend to confuse activity with control and make a change simply to relieve the pressure to act.

What they should do: A disciplined investor asks whether the proposed action improves the financial plan or merely reduces today’s anxiety.

Why the same behaviours keep appearing

The patterns identified by behavioural finance are not character defects. They are normal human responses to risk and uncertainty.

Loss aversion: the urge to stop the pain

Losses generally feel more powerful than equivalent gains feel satisfying. A falling portfolio therefore creates more than a mathematical loss. It creates discomfort and a desire for relief. Selling can provide that relief immediately, but it may also turn a temporary decline into a permanent outcome and create a second difficult decision about when to reinvest.

Recency bias: projecting the present into the future

Recent events dominate attention. After sustained gains, investors can underestimate risk. After sharp falls, further losses begin to feel inevitable. In both cases, the recent past is treated as the most likely future, even though markets move in cycles and turning points are visible only in hindsight.

Herding: seeking safety in the group

When uncertainty rises, the behaviour of other people starts to look like useful information. Remaining invested while others appear to be selling can feel reckless. Avoiding a fashionable investment while friends are profiting can feel equally uncomfortable. The crowd may provide emotional reassurance, but it cannot establish whether an investment offers value.

Action bias: confusing movement with progress

Changing a portfolio creates a sense of control. Holding a well-designed strategy can feel passive, particularly when markets are falling. Yet an action should be judged by whether it improves the probability of achieving the investor’s goals, not by whether it temporarily reduces discomfort.

Overconfidence: believing we will recognise the turning point

Moving to cash is often described as temporary: “I will reinvest when conditions settle.” The investor must then make two correct decisions, when to sell and when to return. Recoveries often begin while the economic news remains poor. Waiting for reassurance can mean missing part of the rebound and returning only after prices have already risen.

What successful investors build around themselves

The answer to the behaviour gap is not to eliminate emotion. The answer is to create a decision system that does not require perfect behaviour.

• A clear purpose for every pool of capital, including the goal, time horizon and required return.
• An asset allocation that reflects both financial capacity for loss and the investor’s ability to remain committed through volatility.
• Enough cash and defensive assets to meet foreseeable spending without having to sell growth assets during a downturn.
• Realistic expectations about the frequency and size of market declines.
• A written rule describing what would justify a strategy change and what would not.
• A waiting period before major decisions made under stress are implemented.
• Disciplined rebalancing based on portfolio rules rather than market predictions.
• An adviser or agreed process that acts as a circuit breaker between an emotional impulse and an irreversible transaction.

The best portfolio is not simply the one with the highest expected return. It is the one capable of funding the investor’s goals that the investor can reasonably continue to hold when markets become uncomfortable.

Why current volatility matters

Current volatility is not only testing portfolio values. It is testing whether investors understand why they own what they own, whether near-term needs were planned for and whether important decisions were made before emotions became elevated.

A market fall does not automatically mean the investment strategy is broken. The relevant question is whether something material has changed in the investor’s life, objectives, time horizon, spending requirements or capacity for risk. If those foundations remain intact, lower market prices may be uncomfortable without requiring a different long-term strategy.

The real lesson from DALBAR

DALBAR is often reduced to the statement that investors are their own worst enemy. That is memorable but incomplete. A more useful interpretation is that people predictably find it difficult to maintain long-term strategies under short-term pressure.

Investors fear losses, seek certainty, follow crowds, place too much weight on recent events and want to regain control. Behavioural finance explains these tendencies. DALBAR demonstrates the financial outcomes that can follow when cash flows are poorly timed.

Taken together, the evidence leads to a simple conclusion: investment success depends not only on what an investor owns, but on whether they can continue to own it when conditions become difficult.

The market’s next move is unknowable. Our response does not have to be.

Sources and important information

DALBAR, “DALBAR’s 2026 QAIB Report Shows Narrower Investor Gap Amid a Complex and Volatile Market Year”, 16 April 2026. Historical investor-gap data begins in 1985.

DALBAR, Quantitative Analysis of Investor Behavior. Average Investor returns are calculated from aggregate mutual-fund sales, redemptions and exchanges.