The Behavior Gap: Why Your XEQT Returns Are Worse Than the Fund's

A few months ago, I did something I’d been avoiding for a while. I sat down, opened my Wealthsimple account, and calculated my actual personal return on XEQT since I started investing in it.

Not the return XEQT posted over the same period. My return. The one that accounts for every dollar I actually put in, when I put it in, and – this is the part that stings – the couple of months I paused contributions because “the market felt toppy,” and the time I panic-sold a chunk during a correction and bought back in three weeks later at a higher price.

The result? Over a roughly three-year stretch, XEQT returned approximately 9.2% annualized. My personal return was closer to 6.8%. Same fund. Same time period. A gap of nearly two and a half percent per year – not because XEQT did anything wrong, but because I did. I bought late, I hesitated, I flinched at exactly the wrong moments. And those small, very human decisions cost me thousands of dollars in real wealth.

If that sounds familiar, you’re not alone. In fact, you’re the norm. There is a name for what happened to me, and it’s one of the most important – and most under-discussed – concepts in personal finance.

It’s called the behavior gap. And today, I want to explain exactly what it is, why it’s probably costing you money right now, and how to close it for good.

1. What Is the Behavior Gap?

The term “behavior gap” was coined by financial planner and author Carl Richards, and it describes something deceptively simple: the difference between the return a fund earns and the return the average investor in that fund actually receives.

A fund might post a 10% annualized return over a decade. But the average person who held that fund over the same decade might have earned only 6% or 7%. Not because the fund charged hidden fees. Not because of taxes. Not because of any external force at all.

The gap exists because of behavior. Specifically, because of three things investors do over and over again:

• Buy high. We pour money into funds after they’ve already gone up, because rising prices make us feel confident and validated. When XEQT has had a great year, suddenly everyone wants in.

• Sell low. We pull money out when things drop, because falling prices trigger fear and the desperate urge to “protect what we have left.” When XEQT drops 15%, that’s when people bail.

• Sit on the sidelines at the worst times. We pause contributions during uncertainty, telling ourselves we’ll “wait until things settle down.” Things never feel settled. The waiting costs us the recovery.

Carl Richards often illustrates the behavior gap with a simple napkin sketch: a Venn diagram with one circle labeled “Investment Returns” and the other labeled “Investor Returns,” with a depressingly large gap between them.

That gap is real. It’s measurable. And it is, for most people, the single biggest drag on their long-term wealth – bigger than fees, bigger than taxes, bigger than picking the “wrong” fund.

2. The DALBAR Data: This Isn’t a Theory

If the behavior gap were just a concept, you could dismiss it. But it’s not. It’s one of the most consistently documented phenomena in all of finance.

Every year since 1994, DALBAR Inc. publishes the Quantitative Analysis of Investor Behavior (QAIB) study. It compares the returns of the average equity mutual fund investor against the returns of the S&P 500 index itself. And every single year, the findings tell the same story.

Here are the numbers:

These are not cherry-picked numbers. This pattern has held across virtually every time period DALBAR has studied. The average equity fund investor underperforms the very funds they invest in by roughly 3 to 4 percentage points per year over long time horizons.

Let me put that in dollar terms so it actually hits:

If you invest $500 per month for 25 years and earn 10% annualized (the fund’s return), you end up with approximately $590,000.

If you invest the same $500 per month but earn only 6.5% annualized (the typical investor’s return after the behavior gap), you end up with approximately $380,000.

Same contributions. Same fund. $210,000 less. That is the cost of the behavior gap over a real investing lifetime. It is not a rounding error. It is a house. It is a decade of retirement income. It is, for many Canadians, the difference between financial freedom and working years longer than you planned.

And while the DALBAR data is U.S.-focused, Canadian investors are not immune. Studies from Morningstar’s “Mind the Gap” research have shown similar patterns globally, with the average Canadian fund investor also trailing fund returns by 1.5% to 3% or more annually, depending on the time period and fund category.

3. How the Behavior Gap Shows Up With XEQT

“But I own XEQT,” you might be thinking. “It’s a simple all-in-one ETF. I’m not some day trader chasing meme stocks. Surely this doesn’t apply to me.”

I understand why you’d think that. And XEQT’s simplicity does help reduce some of the behavior gap compared to more complex strategies. But the gap still shows up, in ways that are subtle enough that you might not even realize it’s happening.

Here are the most common ways I’ve seen it play out – and a few I’m guilty of myself:

Buying High After the Buzz

XEQT has become increasingly popular in Canadian personal finance communities. Every time the fund has a great year, there’s a flood of new investors. Reddit threads light up. “Just bought my first shares of XEQT!” posts multiply.

The problem? Many of these purchases happen after the big gains. You hear that XEQT returned 18% last year, you finally pull the trigger, and then the next year it returns 3%. You didn’t buy at the top – but you missed the rally that created the excitement in the first place.

Selling Low During Corrections

This is the classic and most destructive manifestation. XEQT drops 15% during a correction. Your $50,000 portfolio is suddenly showing $42,500. The financial news is full of doom. Your stomach is in knots.

So you sell. Just to “protect what’s left.” You tell yourself you’ll buy back in when things calm down. But when do things calm down? By the time the news sounds positive again, XEQT has already recovered most of the drop. You buy back in near where you sold – or higher – and you’ve locked in a real loss.

I did exactly this during one correction early in my XEQT journey. Sold about 20% of my position. Bought it back three weeks later at a price 6% higher than where I’d sold. That single round trip cost me more than a year’s worth of management fees.

Pausing Contributions During Uncertainty

This one is sneaky because it doesn’t feel like you’re doing anything wrong. You’re not selling. You’re just… pausing. “Markets feel shaky, I’ll hold off on this month’s contribution and see what happens.”

But the months you skip are often the months that matter most. Market recoveries tend to be sharp and front-loaded. If you miss the first few weeks of a bounce because you were waiting for certainty, you miss a disproportionate share of the returns.

Switching Strategies After Short Underperformance

XEQT had a year where it trailed the S&P 500. Suddenly you’re reading about VFV or QQQ or some hot thematic ETF. “Maybe XEQT isn’t the right choice.” So you sell, buy something else, and start a new cycle of emotional decision-making.

This strategy-hopping is a major contributor to the behavior gap. By the time you switch, the thing you’re switching to has likely already had its big run. And now you’ve triggered capital gains, lost your cost base, and introduced complexity that makes future bad decisions more likely.

Lump Sum Timing Paralysis

You have $20,000 to invest. You know you should put it into XEQT. But the market is at an all-time high, so you wait for a dip. The dip doesn’t come. The market goes up another 8%. Now you feel even worse about buying. So you keep waiting.

Six months later, you invest at a price higher than where you would have bought in the first place. Or worse, you’re still waiting. Your cash has earned 3% in a savings account while XEQT has returned 12%. The dip you were waiting for was the price six months ago.

4. The Numbers: What the Behavior Gap Actually Costs XEQT Investors

Let me make this concrete. Here are three hypothetical investors who all start with the same goal: invest $500 per month into XEQT over 10 years. Let’s assume XEQT returns an average of 9% annualized over this period.

Investor A simply showed up every month and let compounding do its work. No heroics. No market analysis. Just consistency.

Investor B didn’t do anything dramatic. They just paused for a few months here and there – the kind of thing that feels completely reasonable in the moment. But those missed months were often the cheapest buying opportunities, and the cumulative cost over a decade was roughly $17,000 in lost wealth.

Investor C did the most damage with a single decision. One panic sell and delayed re-entry was enough to shave roughly 2.5% off their annualized return, costing them around $14,000 compared to simply staying the course.

These are conservative estimates. Over 20 or 30 years, the differences compound dramatically. A 2.5% annual behavior gap over a 30-year investing career can easily cost six figures.

5. Why Your Brain Is Wired for the Behavior Gap

If the behavior gap is so costly and so well-documented, why do investors keep falling into it? Because our brains are literally wired for it. The same psychological adaptations that kept our ancestors alive on the savannah are spectacularly ill-suited to financial markets.

Three biases do most of the damage:

Loss Aversion

The pain of losing $1,000 feels roughly twice as intense as the pleasure of gaining $1,000. This is loss aversion, and it’s the primary driver of panic selling. When your XEQT position drops, the emotional pain is so acute that your brain screams at you to make it stop – even if the rational choice is to do nothing or buy more.

Recency Bias

We dramatically overweight recent events when making predictions about the future. If XEQT has dropped for three straight months, our brains project that trend forward indefinitely: “It’s going to keep dropping.” If it’s risen for a year, we assume it will keep rising. This is recency bias, and it’s the engine behind both buying high and selling low.

Herd Mentality

When everyone around you is panicking, it feels dangerous to stay calm. When everyone is euphoric, it feels foolish to be cautious. Herd mentality pulls us toward the consensus, which in investing almost always means doing the wrong thing at the wrong time.

I’ve written in more depth about each of these biases if you want to go deeper. For the purposes of the behavior gap, the key point is this: these are not character flaws. They are features of human psychology that served our species well for hundreds of thousands of years. They just happen to be catastrophically bad for investing.

You are not stupid for feeling the urge to sell during a crash. You are human. The question is whether you build systems that prevent your human instincts from destroying your wealth.

6. Dollar-Weighted vs. Time-Weighted Returns: Why Your Number Is Different

There’s a technical distinction that explains why your personal return almost always looks different from the fund’s published return, and it’s worth understanding.

When XEQT publishes its performance – say, “10% annualized over the last 5 years” – that’s a time-weighted return. It measures how the fund performed over a period, regardless of how much money was in it at any given time. It’s the return you would have earned if you invested a single lump sum at the start and never touched it.

Your personal return, however, is a dollar-weighted return (also called money-weighted or internal rate of return). It accounts for the timing and size of every contribution and withdrawal you made. If you added more money right before a dip and less money right before a rally, your dollar-weighted return will be lower than the fund’s time-weighted return – even though you held the exact same fund.

Here’s a simple example:

• January: You invest $10,000 in XEQT. The fund returns +20% that year.
• December: Excited by the gains, you add another $10,000.
• Next year: XEQT returns -10%.

The fund’s time-weighted return over those two years is about +4.0% annualized. But your dollar-weighted return is worse, because you had more money in the fund during the bad year than during the good year. Your return is closer to +0.7% annualized.

Same fund. Same two years. Dramatically different outcomes – entirely because of when you put the money in.

This is the mechanical explanation for the behavior gap. Every time you add more money after a rally (buying high) or pull money out during a drop (selling low), you’re tilting your dollar-weighted return against you. And the DALBAR data shows that investors do this systematically, consistently, and to a remarkable degree.

Understanding this distinction won’t automatically fix the problem, but it helps you see why “just buy XEQT” isn’t enough. You have to buy it consistently, regardless of what the market is doing.

7. How to Close the Behavior Gap for Good

Here’s the good news: the behavior gap is one of the few problems in finance that you can almost entirely solve by yourself, for free, without any specialized knowledge. You don’t need a financial advisor. You don’t need a PhD. You just need systems and self-awareness.

Automate Your Contributions

This is the single most powerful thing you can do. Set up recurring buys on Wealthsimple so that a fixed dollar amount goes into XEQT every week, every two weeks, or every month – automatically, without you lifting a finger.

When your contributions are automated, you buy when the market is up and you buy when the market is down. You buy when you’re scared and you buy when you’re euphoric and you buy when you’ve completely forgotten about your portfolio. This is dollar-cost averaging in its purest form, and it eliminates the timing decisions that create the behavior gap.

I set up automatic bi-weekly XEQT purchases on Wealthsimple, timed with my paycheque. Since doing so, I haven’t missed a single contribution. My behavior gap has effectively gone to zero – not because I became a more disciplined person, but because I removed the decision entirely.

Stop Checking Your Portfolio

Every time you open your brokerage app, you give your brain an opportunity to make an emotional decision. The more frequently you check, the more often you’ll see losses (since markets fluctuate daily), and the more likely you are to feel the urge to do something.

The research backs this up. Investors who check their portfolios daily are significantly more likely to sell during downturns than those who check monthly or quarterly. The information isn’t helping you – it’s hurting you.

My advice: delete the app from your phone. Or at least move it off your home screen and turn off notifications. Check your portfolio once a month at most, and ideally only when you’re contributing.

Write an Investment Policy Statement

An investment policy statement is a short document – even half a page is fine – that you write before the next crash happens. It spells out your strategy, your asset allocation, your contribution plan, and crucially, what you will and won’t do during a downturn.

Mine says something like: “I invest in XEQT. I contribute $X bi-weekly via automatic purchase. I do not sell during market declines. I do not change my strategy based on short-term performance. If the market drops more than 20%, I will consider increasing contributions, not decreasing them.”

When the next correction hits (and it will), you don’t have to make a decision in the heat of the moment. You’ve already decided. You just follow the plan you wrote when you were calm and rational.

Remember the Fidelity Study

There’s a famous anecdote – often attributed to an internal Fidelity study – that the best-performing accounts were owned by people who were dead or had forgotten they had accounts. While the exact attribution is debated, the underlying principle is real and well-supported: the less you tinker with your investments, the better you tend to do.

This isn’t a joke. Inactivity is a genuine competitive advantage in investing. Every decision you make is an opportunity to make a mistake. The investors who do best are the ones who make the fewest decisions. Set it up, automate it, and then find something else to think about.

Have a Plan Before the Next Crash

The worst time to decide what to do during a market crash is during a market crash. If you haven’t thought through how you’ll react to a 20%, 30%, or even 40% drop in your portfolio value, you’ll default to your instincts – and your instincts will tell you to sell.

Read about surviving your first market crash before it happens. Internalize the data that shows markets have always recovered. Understand that corrections are not just normal but necessary. And commit – in writing, ideally – to staying the course.

The behavior gap is not closed by willpower. Willpower fails when emotions are high. It’s closed by systems, automation, and decisions made in advance.

8. XEQT’s Simplicity Is Your Greatest Weapon

Here’s the part that brings it all together, and it’s the reason I keep coming back to XEQT as the foundation of a wealth-building strategy.

Most of the behavior gap is driven by complexity. The more decisions you have to make, the more opportunities you have to make bad ones. If you’re managing a portfolio of 10 ETFs, you’re constantly asking yourself: Should I rebalance? Is my Canadian allocation too high? Should I tilt more toward value? What about bonds? Is emerging market exposure worth the volatility?

Every one of those questions is a potential trigger for an emotional decision that hurts your returns.

XEQT eliminates almost all of them. It’s one fund. It holds over 9,000 stocks across the entire world. BlackRock handles the rebalancing. The allocation is set. There are no decisions to make.

Your entire investing strategy becomes:

1. Open a Wealthsimple account
2. Set up automatic recurring purchases of XEQT
3. Do nothing else

That’s it. That’s the whole strategy. And it works precisely because it’s boring, because it removes decisions, because it gives your brain nothing to react to.

The investors with the smallest behavior gaps aren’t the smartest or the most disciplined. They’re the ones with the simplest systems. And there is no simpler system than a single globally diversified ETF on autopilot.

I think about this a lot. The financial industry spends billions of dollars trying to convince you that investing is complex, that you need sophisticated tools and strategies and advice. And some of that has value. But for the vast majority of Canadian investors, the single most valuable thing you can do for your financial future is not find a better fund or a smarter strategy – it’s close the behavior gap on the fund you already own.

XEQT doesn’t need to be improved. Your behavior around it does. And the beautiful thing is that closing the behavior gap doesn’t require more knowledge, more effort, or more time. It requires less. Less checking. Less deciding. Less reacting.

Automate. Simplify. Forget.

That’s how you earn the returns you actually deserve.