When I first started investing, I bought mutual funds. My rationale was that fund managers had to know more about the market than me… right?
The 1990s were the golden age of mutual funds. Fund managers like Peter Lynch were treated like rock stars.
Mutual funds were featured prominently in investing magazines, like Money and Kiplinger.
But now their dirty little secret has come out. Year after year after year, actively managed funds underperform the market.
Want to hear a shocking statistic?
Ariadne Wealth Management recently conducted a study of Fidelity’s 136 large cap mutual funds. The number that beat the S&P 500 was staggeringly low.
Take a guess how low.
Twenty?
Ten?
The answer is ZERO.
None of Fidelity’s large cap mutual funds beat the S&P 500. Not a single one.
Nada. Bupkis. Goose egg.
You’d think one or two might have beaten the S&P just by accident!
And keep in mind…
Fidelity’s fund managers weren’t picked out of a high school detention class. These are smart individuals with MBAs from Wharton, the University of Chicago and the like.
Yet despite those accomplishments, this study proves that the actively managed mutual fund model doesn’t work.
Sure, you may find a few superb fund managers like Lynch who deliver outperformance. But they are very hard to find. (And if you want consistent outperformance, they’re nearly impossible to find.)
Fidelity is hardly alone.
Standard & Poor’s determined that 88% of actively managed mutual funds fail to beat their benchmarks. And that underperformance comes at a price…
The expense ratio for an actively managed fund is 60 basis points – 0.6% higher than that of a passive fund (one that follows an index).
There are several reasons you will most likely underperform the market when investing in actively managed funds.
If you don’t want to pick your own stocks, the easiest thing to do is invest in an index fund. Not only will it be cheaper but also, as the statistics show, you’ll make more money.
Let someone else pay Harvard MBAs for underperformance.
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