The correct answer is:
Worse than the
market
Explanation:
Mutual fund
| Expenses
Matter |
Many Funds Beat The Market...
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| Gross
Returns for Equity Funds Compared to the Market*, 1983-1998† |
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107
funds |
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93
funds |
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Better
Than the
Market |
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Worse
Than the
Market |
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...Until You Account For Expenses
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| Net
Returns for Equity Funds Compared to the Market*, 1983-1998† |
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167
funds |
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33
funds |
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Better
Than the
Market |
|
Worse
Than the
Market |
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*Wilshire
5000 Index.
†Growth and
value equity funds that were available in 1983 and still available June
30, 1998
Source: adapted
from Bogle, Common
Sense on Mutual Funds, 1999 |
managers, and the trades they execute, make up a very large part of the
overall stock market. So all other things being equal, you would expect
their performance to be roughly equal to that of the market.
But it turns out that all other things are not equal. Actively
managed mutual funds incur more costs--manager compensation, trading costs,
and even taxes--than an investor in a broad, passively-managed index fund
would incur. (See "Expenses Matter", at right.) If you measure mutual funds
by their gross return, it turns out that over the period 1983-1998
their performance is close to equal that of the market (measured here as
the Wilshire 5000 index). But investors in mutual funds don't earn gross
returns (which are the returns mutual funds usually advertise, and are
reported broadly, including in our Mutual
Fund Screener).
Instead, investors earn a net return--the gross return of the
mutual fund less the fund's expenses, including marketing, trading, and
administration. Those expenses, which can easily be 2% annually of an investor's
investment in a fund, make quite a bit of difference over time. Factoring
expenses in, John Bogle reported in the book Common
Sense on Mutual Funds that only about 16% of the equity funds in that
period outperformed the market. Keep in mind, too, that these figures are
a bit biased, since funds with exceptionally poor returns would have been
shut down or merged during the period.
More about mutual funds:
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