Mutual funds or index funds? The fees are (much) lower with index funds, but what about performance? We have you covered.
Imagine the NFL without Tom Brady, or the NBA without Lebron. Take that feeling and apply it to mutual fund investing over the last 5 years (stay with us). Not a single mutual fund consistently outplayed their peers. S&P Dow Jones Indices took a deep dive and analyzed 2,132 actively managed stock mutual funds, sidelining the niche sector players and the ones that used borrowed money to magnify returns. The chosen few, the top 25 percent performers for 12 months leading to June 2018, had their performance tracked for four 12-month periods, ending in June 2022. How many stayed in the top 25% year over year?
Zero.
Not one fund could sustain top-tier performance for five consecutive years. The same sad tale echoed in fixed-income funds – no bond fund stood tall in the top quarter for four consecutive 12-month periods. Even when they lowered the bar, asking how many funds consistently hit the top 50 percent year after year, a measly 1 percent of the stock funds made the cut.
Think about a bustling city with more than 2,100 restaurants. If not a single eatery consistently ranks in the top 25 percent, you’d begin questioning the city’s culinary scene – either the chefs need a serious upgrade or the food critics might be missing some flavors. Your friends come to visit, and they ask for the best Italian food, you might be suggesting a dud.
What’s the alternative?
Like the famous Rick Flair once said, “to be the man, you have to beat the man.”
In the financial arena, it’s a constant game of “beating the man,” and the man here is the market. Now, let’s talk numbers – another study found that only 6.6% of actively managed US funds outperformed the S&P 500 in the last 15 years. So, how do you beat the man? Be the index.
Index funds aren’t just an option; they’re the playbook for financial victory, providing a reliable path in an arena where beating the odds is no easy feat.