How to grow $700k to $5.4m – and why panic selling could halve returns
Volatile markets are the new normal, but what does reacting to market noise really cost investors?
From the rapid rise of AI to conflicting signals over what assets are truly worth, today’s markets offer a steady stream of noise.
It’s enough to make even seasoned investors feel uneasy, raising a question that resurfaces whenever uncertainty peaks: should you keep investing through the madness, or wait on the sidelines for a quieter entry point?
The answer has less to do with picking the perfect moment and more to do with the actual cost of reacting to the chaos.
Trying to time the market can be a rollercoaster that destroys returns. Bethany Rae
Every year, Morningstar runs a US-based study called Mind the Gap, comparing the return of the average dollar invested in managed funds and ETFs with what those funds earned. The two numbers should be close. They rarely are.
Morningstar’s research consistently shows that the average investor earns less than the funds they hold. That gap, driven almost entirely by the timing and size of investors’ own buying and selling, was a 1.2 percentage point annual shortfall. That is equivalent to giving up about 12 per cent of the return the funds generate each year.
This behaviour isn’t limited to reckless trading; it creeps in through well-intentioned decisions made at the wrong moment. Morningstar’s research finds that investors in simple, diversified, set-and-forget funds capture most of their funds’ returns, while those in more volatile, actively traded categories capture far less.
The lesson is straightforward. The more disciplined and consistent the approach, the more likely investors are to earn the returns their investments generate. We wanted to test whether the same pattern exists in Australian equities, and which behaviours prove most costly.
Four investors, one experiment
We’ve updated some Morningstar research we first conducted in 2023, involving four hypothetical investors: Annie, Bridget, Charlie and Don.
Each start with $100,000 in December 1992 and set aside $1500 a month to invest. That money goes into their bank account, then gets deployed into the Australian sharemarket according to a personality-driven rule akin to a fund manager with disciplined processes.
A “control” participant, Steady Eddy, simply invests his $1500 immediately into the market at the start of every month.
We used the Vanguard Australian shares index fund as Eddy’s proxy, net of fees (spliced with the S&P/ASX All Ordinaries total return index for the years before the Vanguard fund existed). This reflects the return an investor could achieve, fees included, rather than a raw benchmark figure.
Nearly 34 years on, with the experiment running through to July 31, 2026, the total capital contributed by each investor is the same at $704,500, yet the outcomes are different – and revealing.
Steady Eddy’s balance stands at $5.36 million. Annie, the disciplined modest dip-buyer, is close behind at $5.35 million. Momentum-chasing Charlie and deep-dip buyer Bridget trail with $5.21 million and $5.17 million, respectively.
Panic seller Don, whose rule sees him sell out of the market and never brings him back in, sits at $2.26 million – less than half of Eddy’s outcome, despite contributing the same amount of capital as everyone else.
Every dollar sitting in cash while an investor waits for a signal to buy is a dollar not compounding. Notably, in the strong, dip-friendly market of the past few years, Annie’s disciplined buying has closed most of the gap to Eddy.
This is insightful as it shows the cost of waiting depends on the market regime, even where the ranking rarely changes. Don’s result isn’t a story about bad luck. His rule was designed to protect him from a crash, but instead it delivered one on its own terms: a gradual, self-imposed exit he was structurally unable to reverse. It amounts to a negative asset allocation decision.
Timing matters – just not in the way most investors think
These results do not mean the entry point is irrelevant. It means that the risk is more about when your investing life starts, as a matter of circumstance, rather than trying to actively dodge it.
Australian equities were used for this exercise specifically to illustrate the impact of timing on investment decisions. The benefits of diversification across asset classes continue to hold, especially at times when market valuations are uncertain.
It’s worth being clear about who this experiment speaks to. The 34-year time horizon tested here suits an investor still accumulating capital, with enough runway for a poorly timed entry to wash out.
The picture looks different for someone closer to drawing down their capital, which the breakdown below helps illustrate.
Breaking the same 30-plus years into non-overlapping seven-year blocks (the approximate length of a business cycle) shows this clearly:
This is what financial planners and retirees face as sequencing risk, and it’s real – nobody chooses which seven-year stretch of returns they’re handed.
What the data also shows is that this risk shrinks dramatically as the time horizon lengthens. If we chain all five periods together into the full horizon to 2026, then the annualised equity return settles at 9.5 per cent per annum, comfortably ahead of cash’s 4.2 per cent per annum return across the same span – and this includes the GFC period.
Sequencing risk doesn’t disappear with a longer horizon, but it gets diluted because a poor seven-year stretch becomes one more input among several, instead of being the whole story.
What this means today
None of this is about whether the market is expensive or cheap right now.
Morningstar’s US research and our Australian experiment point to the same conclusion from two different markets – that investors tend to give away a meaningful share of their returns not through one dramatic mistake, but through the accumulated cost of reacting, be that buying in on a rally, selling out in a downturn, or waiting for a clearer signal that never quite arrives.
For long-term accumulators, the fix is almost boring in its simplicity: stay invested, keep contributing, and resist the urge to act on every swing in sentiment.
The investors who capture most of their funds’ returns are usually the ones doing the least in response to short-term market noise.
For pre-retirees and those with shorter time horizons, the answer isn’t market timing either. It’s about portfolio structure. Instead of holding cash to wait for a crash – a timing decision that demands being right on both the exit and re-entry – shorter-horizon investors manage valuation risk through diversification, position sizing, and dedicated defensive cash buffers.
There’s a structural irony worth noting here. Superannuation, almost by design, enforces much of this discipline for you by pairing regular compulsory contributions regardless of market mood with structural friction around early access that makes panic-selling an entire balance rare in practice.
It is a system that nudges the portfolios of millions of Australians toward those of Steady Eddy, whether they’ve ever thought about it or not.
Ultimately, the useful question isn’t whether markets are overpriced today. It’s whether your portfolio structure matches your specific time horizon so you’re not relying on a well-timed call you don’t need to make.
