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As a Kiplinger’s Personal Finance – Subscription
holder, I often find good snippets of information. If you weed through the advice to buy mutual funds then it can be very helpful. Recently there was an article about the actively managed mutual funds versus index funds and a discussion on who wins. Once again, index funds came out on top.[ad#tdg-embedded]
In the following image, the results are pretty clear. Over all periods of time, a relatively small percentage of actively managed funds manage to beat the underlying index. For example, when it comes to large companies, only 31% of actively managed funds manage to beat its corresponding index. In other words, it is often a better strategy to just buy the index rather than take your chances with an actively management mutual fund.
Click to EnlargeWhat I found most interesting was in bear markets 58% of actively managed mutual funds did manage to beat the indexes. At first an investor would say that that is pretty good – over one half of the actively managed funds did better. However, what the chart does not say is that an investor would need to choose from the literally thousands of mutual funds available to find those ones that actually did beat the index. Think of it like finding a needle in a haystack.
I think the message is pretty clear, active management does not benefit most of the time. To weed through the thousands of mutual funds to try to find the ones that will beat the market is a tough thing to do. Mutual funds are supposed to provide diversification while providing you with the ability to beat the market. They may provide diversification but an index fund will do that while meeting the market average at the same time.
So why do I still invest in individual dividend stocks you may be asking yourself? Basically because I love the process and I love the growing dividends those stocks throw off. To help protect against the additional risks of being active, I hold a core portfolio of index funds that meet my asset allocation needs and keep the individual dividend stock portion to a very specific amount. I have seen good results with this.
Interesting post; It really does indicate the complexities involved in mutual fund selection and trying to ensure sufficient returns on investment. In comparison to index funds always coming out on top, the next question is arguably: why are so many mutual funds so badly managed?
The results for small and mid-caps are particularly interesting.
I wonder if these returns were net of fees? The index funds are, by definition, more diversified than the mutual funds, which can only hold x number of stocks. And I have seen some pretty high mutual fund fees that would deter me from investing.
What do you think the best company is for index funds? Vanguard?