That is according to a report by S&P Dow Jones Indices that compared the performance of Mutual funds to that of the S&P 500 from June 2009 to June 2014. The table of comparisons (with our comments in red) is shown below:
In this article, when we refer to the Stock Market we are usually referring to the S&P 500
Are you losing Money ?
Yes, Very likely.
By losing money we don’t mean actually losing money, instead, we’re talking about leaving money on the table. For example, say your mutual fund made 7% last year but the Stock Market made 10%, that means you “lost” 3% (i.e. 10% – 7% = 3%).
If 87% of mutual funds did worst than the stock market, then there’s almost that big of a probability that you own one of those underperforming funds.
But your Mutual Fund did well last year, it’s going to do good next year too, right?
No, it probably won’t do well next year or any year thereafter.
The bad news keep on piling for Mutual Funds. In another study by S&P Dow Jones indices, and well documented by the Washington Post article “Do any Mutual Funds ever Beat the Market? Hardly“, it was found that the those Mutual Funds that were in the top 25% performers at the beginning of the study, only 0.2% managed to stay in the top 25% after 5 years. In fact, about one quarter of them made it to the bottom, being in the worst performers group.
Let’s put that in different words: Almost ZERO mutual funds were able to stay as top performers in the long term. If you think you can look at the past performance of a mutual fund and assume that mutual fund will do well in the future, you are Very Wrong. The disclosure “Past Performance does not indicate future performance” couldn’t be more true.
Wait a Minute, Sherlock, This Mutual Fund company is rated one of the best in the Business, how can they claim that?
Marketing, Marketing, Marketing. And again, the probability of high performance to continue into the future is very slim, close to zero, but let us introduce the concept of “Survivorship Bias”. Survivorship Bias is extremely common in the world of Mutual Funds. When a mutual fund is underperforming or the fund doesn’t have too much money invested (i.e. low asset accumulation) then the fund is closed or simply swallowed (merged) by another bigger fund with the result of hiding the poor performance.
This means that the performance of only the “successful” funds is reported (the ones that are still in existence), without including the bad performance funds (the ones that no longer exist), giving the -false- impression that the fund company group of funds did actually very good, when in fact, it didn’t. This is, by the way, totally legal.
To be fair, there is a very small number of Mutual Funds that have done very well over the long term. The chances of the average investor finding those funds are low, and the chances that those mutual funds will continue to do well in the future, are even smaller. Remember, your financial advisor gets a commission to sell you a Mutual Fund… He might not care if the Mutual Fund he’s selling you is a poor performer, he might just care about whether that mutual fund pays him a good commission.
The #1 Secret to Beating almost 100% of those Mutual Funds that can’t beat the Market
Fire your Financial Advisor. Simply buy and hold for many years, an S&P 500 ETF and you will outperform almost all the Mutual Funds that can’t beat the market. It’s that simple. There is a few problems though, and many of these problems have to do with investors’ decisions. Let’s look at an Example:
Let’s go back in time, and we’re at the end of the year 2007. The Stock Market starts to plummet, next thing you know, your S&P500 ETF is down 50% from it’s October High. Think about it, 50%! That’s half your money, gone, in a matter of a few months. We know from research (See graph below with our comments in green) that the retail investor tends to buy at the wrong times and sell at the wrong times. Chances are, if you would have been down 50% on your ETF, you too would have sold.
In fact, between 2009 and 2015, many times the market tanked and people still sold and bought at the wrong times. Buying and selling at the wrong times can be completely catastrophic.
However, if you were willing to buy the S&P 500 ETF and hold it for many years, without selling, and re-investing dividends, and have the stomach to sit through heavy losses in your portfolio once in a while, then you would have done a lot better than almost 90% of mutual funds, without paying any financial advisors fees and commissions or High Mutual fund management fees. Again, we know that, in general, when people are exposed to severe losses, most of them become less aggressive, become emotional, and rush to sell at the worst possible time and buy back shares at the worst possible time.
You Could do Better
There are thousands of ETFs, a combination of which could create a portfolio to beat the S&P 500, however, be mindful of the Economic Cycle.
This website contains only general information, which must not be construed as specific advice or recommendations
