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Why So Many Mutual Funds Can’t Beat the Indexes

Why So Many Mutual Funds Can’t Beat the Indexes

Investing in stock indexes doesn’t require any skill in stock picking at all. How can no skill beat the presumed skill of fund managers? They obviously aren’t using much skill.

Actively managed mutual funds have quite a few limitations versus what we can do with our own accounts as individual investors. If we are considering investing in an active fund, it’s always important to look at what other approaches we could take instead, and how active mutual fund investing stacks up to these other approaches, so we will at least be in a better position to decide.


  • edited February 2020
    Call me a fool -- albeit one who sleeps well at night -- but i don't give a fig about beating the indexes. The indexes are topheavy with momentum players and subject to all sorts of pressures from funds and ETFs which make them (to me) artificial and not as trustworthy as folks think.

    Give me active & well-allocated/managed, low-cost funds and selected quality individual stocks, let me pull down roughtly 6-8% growth rate per year with a portfolio diversified according to MY analytical due diligence, and I'll be happy. I don't want or *need* to wring every single nickel out of the market just because it's there for the taking. If that portfolio eeks out 10% or more because of the "rising tide" phenomenon, so be it, I won't complain. But I refuse to use indexes as the arbitrary sign of my investing 'success' or goal posts.
  • edited February 2020
    I wished these Headline Articles would be more specific. To be accurate, it should have said "Stock" mutual funds have a hard time beating "Stock" indexes. That is why there are a number of investors, who will combine a "Stock" index fund, with an "Actively Managed" bond mutual fund. There are many multisector, non-traditional, short term, bond mutual funds that handily beat their respective bond indexes.
  • Another recyclable article among hundreds/thousands. Remember, media options are huge and why you find scary titles without proofs. The goal is for you to go to their site and by visiting the site the author/company gets paid.
    When stocks go down 5+% you will see the crash is coming soon, valuations are too high. Stocks go up, valuations are too high and a crash may come soon.
    Every several weeks...the following 10 funds have beaten the index...or what should you buy now...SS will be out of money...value will beat growth soon...EM will beat US stocks...Then recycle again.
    Basically, I think that over 95% of the articles are useless.
  • Got to pay the bills someway !!
  • Posting just for the sake of posting. Nothing new here.
  • edited February 2020
    After a nights sleep this post did not make sense so removed.
  • I think too many funds are placed in the wrong category and/or benchmarked against the wrong or an inappropriate index.
  • And I would add, many managers play within several indexes, mid, large, growth, value... and add a percentage of International. Why would you compare that to the S&P 500 for instance.
  • Gary said:

    I would say Index funds are no better or no worse then what they are indexed against. In theory half the funds are above the index and half are below. What do you think about that sports fans.

    This couldn't be more inaccurate...
  • edited February 2020
    In theory half the funds are above the index and half are below.
    Before fees, it might be 50-50. After deducting fees, it's not even close and the longer you have that fee drag on an active fund compared to a benchmark the more likely it is it will lag:
    That's why over the last fifteen years the Vanguard Total Stock Market Fund has beaten 85% of its competitors. An active manager in the short-term might have one or two blowout years where they best the market by a wide margin, but sooner or later most slip up while that fee drag they have is like clockwork, deducting upwards of one percentage point a year from returns. It is the certainty of the fee drag versus the quasi-randomness of outperformance that makes index funds so hard to beat.
  • edited February 2020
    Why accept 6% TR on a managed fund at a high ER when twice that TR is available for .05% or less using index funds? I do pay 1.3% for superior managed performance for part of my portfolio.
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