If you've been reading the blog and following me on Instagram (hope you are, if not follow me @thelaymaninvestor) you know that I'm not a big fan of mutual funds. Why? Well, their performance is just underwhelming and many of them make false promises. The fees kill the layman investor's long term profits. But I can go on and on just saying this stuff, however, numbers can cut through in a more honest and succinct way that beliefs can't. So, that's what I'm going to provide you with below. Numbers. I know, it may sound boring, but trust me, once you see these numbers below, you'll understand why mutual funds just aren't worth it and that, comparatively, index funds are a much better route for the layman investor. This blog is inspired by Chapter Ten of Jack Bogle's book: The Little Book of Common Sense Investing.
In this chapter Jack Bogle looks at the history of 355 mutual funds that existed between 1970-2016. The picture below shows the performance of all 355. The numbers are staggering and will just show you how bad mutual funds are as an investment vehicle:
Here we can see that right off the bat, 281 did not survive the 46 year period. Boom! That's about 80% of the mutual funds gone. BYEEEEE!!! Now the ones that survived: Of the 74 that remained, 11 of them were outright losers trailing the market by more than 2%, 18 were marginal losers, which means they trailed by 1-2%, 35 were market equivalents, which means they may have beat or lost to the market by 1%, 8 were marginal winners, which means they beat the market by 1-2%, and only 2 were outright winners, beating the market by 2% or more. SO, out of the 355 mutual funds: 80% died, 3% were solid losers, 5% were marginal losers, 10% were market equivalents, 2% were marginal winners, and .5% were outright winners.
That's right!!!! .5% were outright winners. That is horrific!
Oh and good luck trying to find those funds and betting on them for the foreseeable future. There's no way in your busy lives that you could find those 2 unicorn funds. OH! and don't forget these are mutual funds, so the fees are high and will eat into your returns. Also you'll be paying short-term and long-term capital gains!! Do you get it now? Have I made the point clear? Why waste time with mutual funds when they underperform?!?! Why take the time to look for and bet on which mutual funds will be the winners? IT DOESN'T MAKE SENSE!!!!
Mutual funds are another reminder to me that when people don't know what their doing, they'll get ripped off. Why buy mutual funds, when you can just buy index funds, track the market and keep more of your money? Isn't it common sense, especially when you see the numbers, that an index fund is a better way to go? Oh! and I forgot to mention that in the same period, if you invested in a Vanguard index tracking fund in 1974, you would have averaged an 11.7% return. Need I say more??!?! Index funds, when compared to mutual funds, are the superior investment vehicle for the layman investor. This is why it is soooooo vital to upgrade your financial literacy, so you can see through the bullshit. Index funds are in no way the ONLY investment vehicle out there, but as I've been saying they're a great place for the layman investor to start.
I hope this further illuminated the poor performance of mutual funds in the long-run. For those of you still invested in them, I hope you now re-evaluate your choices and switch to a low-cost index fund. I am in no way a financial advisor as I have said before, but c'mon, the numbers speak for themselves. Till next time layman investors!!