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Mutual Funds versus Index Funds

The only reason to buy an actively managed mutual fund is if you can pick a consistent winner that will beat the returns of an index fund like the S&P500 funds. You have to find a fund that you believe will have superior future performance. 

Also, with actively managed funds you need to take into account their after tax returns. The actively managed funds do more frequent trading and that will likely result in a larger tax obligation at the end of the year. Index funds will be tax efficient because they do not frequently trade their stock holdings.

Studies have shown there is no reliable way to successfully predict which funds will be the best performers in the future. If you survey investors some 80% of them will say they are above average investors, while no more than 50% of them can be above average. Morningstar's five star rated funds have not generated above the market average returns. These top funds generated 13.6% over 25 years compared to the S&P500 with 14.3% over the same time frame.

In 1999 the Vanguard Index 500 fund (tracks the S&P 500) had a 21% return for the year. The Fidelity Spartan Market Index fund (tracks the S&P 500) had a 20.6% return for the year.

 

Copyright 2000 John Giudice, All Rights Reserved