Professional Stock Pickers Are Failing Their Test

Chances are your actively managed mutual fund is disappointing you. You’d probably get better returns investing in an index fund that charges lower fees.

An index fund goes up and down with the index it follows. If it’s a large-cap growth fund, for example, it follows an index made up of large companies in traditionally high-growth sectors like tech and health care. A managed fund picks its own big growth companies. If it picks them well, it does better than an index fund. If it doesn’t, it does worse.

For a managed fund to stand out, all it has to do is perform better (or less poorly) than its related index. It doesn’t necessarily have to make a profit. For example, if the index falls 10 percent and the managed fund drops "only" 7 percent, that fund is considered to have done well.

It seems that the bar has been set pretty low, doesn’t it? Maybe we should set it even lower…

So far this year, in only three of nine categories have the majority of funds managed to beat their index. If you have invested in a large blend fund (blend incorporates both value and growth), a small blend fund, or a small value fund, congratulations. More likely than not, your fund is outperforming its related index. (More than 50 percent of these funds do.)

But if you have invested in a growth fund, your investment could be in trouble. Less than 30 percent of those funds are beating their index.

Does that mean you should switch to a large or small blend fund or a small value fund? No. These three fund categories are beating their indexes by a mere half-percent or less. It’s hardly worth the effort.

But when considering funds in the future, remember that the higher fees you pay for actively managed funds don’t necessarily get you better results when the market goes down. Index funds do just as well - or just as poorly.

[Ed. Note: Low risk and safety are two hot commodities in the investing world these days. ETR Investment Director Andrew Gordon can give you both - plus the best chance of profiting - in practically any market. Learn more here.]  

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