Why I hate Mutual Funds Part 3: POOR PERFORMANCE


As an investment advisor, I see people’s statements for mutual funds they’ve owned for 10, 15 or more years. Sadly, many of these folks average only 3% annual returns after calculating for fees and expenses. They’re barely keeping up with inflation.

Most mutual funds underperform the market

About 75% of all mutual funds fail to beat the major market indexes, like the S&P 500. Index mutual funds tend to be low-cost investment vehicles in comparison to actively managed funds, and they perform better, too.
* A 2015 Morningstar study found that actively managed funds lagged behind their passive counterparts across 11 out of 12 asset classes, especially over a 10-year period from 2004 to 2014.
* “No U.S. equity category had a success rate higher than 50 percent compared with their index-fund peers over trailing three- and five-year periods,” states a CNBC article.

Mutual fund managers have no advantage

These days, mutual fund managers have a hard time beating standard performance measures. New trading technologies have made it hard to arbitrage the investment markets — to find buy-in opportunities others have yet to discover.

“Market analysts point to new types of souped-up computerized trading and extraordinary global economic turmoil” as causing big bounces in stock prices, the New York Times says. This makes it difficult for managers to make stock picks. “High-frequency traders, using powerful computers to trade at exceptionally high speeds, now account for up to 60% of daily turnover,” says the Times.
Thus, many question whether mutual fund managers truly have better stock-picking capabilities than the average investor. “The ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results,” says Berkshire Hathaway CEO Warren Buffett.