As the exchange traded fund (ETF) industry continues to grow, the question arises as to whether ETFs will be able to replace mutual funds, which have long been believed to be a smart place to put your money.
Hate to burst your bubble, but they’re not. There are some startling numbers out there to prove it.
Dan Heath and Chip Heath for Fast Company recently reported that if you were to own actively managed mutual funds, you will almost definitely retire with a lot less money than if you invested only in index funds. They support this by explaining the results found in a study of mutual fund returns from 1979 to 1998, where mutual funds underperformed the Vanguard 500 Index Fund by a 2.8% per year on average, after taxes.
Similarly, of all 203 mutual funds with at least $100 million under management from 1984 to 1998, only eight were able to beat the Vanguard 500. The myth of the mutual fund is clearly apparent here, as the chances of picking a winning mutual fund in this period is less than 4%.
This news is hardly new, though. So, why are people still falling for mutual funds?
What causes this myth to live on is the choice of investors to trust the Harvard and Wharton MBAs behind these actively managed mutual funds. With funds that track an index, there is not a mind behind the investing but merely mechanics, as it tracks the market’s performance.
The tendency of the investor to prefer Ivy League intellect over market returns is what keeps actively managed mutual funds a myth. Even if these funds were to beat the market, investors still may end up below the market average because of fees associated with these funds.
Mutual funds being the safest and smartest place for your money is a myth that Dan and Chip Heath do not buy, and neither do we.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.