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Why Your Stock Mutual Fund Might Be A Loser

| March 14, 2017
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How did your stock fund do last year? Any idea? I bet you were happy with it. 2016 was a good year in the financial markets. What’s funny is that 2016 got off to a brutal start. January 2016 was the worst start to a calendar year we’ve ever had. EVER! The Dow Jones Industrial average was off 5.5% and finished the month at 16,466. The NASDAQ sank just under 8%. The S&P 500 fell 5%. Oil finished January 2016 at $26/barrel (Oil is around $48/barrel today).

Needless to say, it was a tough way to start the year off. Come to think of it, 2016 was a unique year in general. Trump won the presidency and the Cubs won the World Series (against the Cleveland Indians, nonetheless). Do I really need to expand anymore on 2016? No, but I’m still going to.

After that brutal start, the markets staged a comeback nothing short of amazing. After that -5.5% start for the DOW, it ended with a 13.4% gain. The S&P500 ended last year with an 11.96% gain. Pretty wild considering where those indices began.

With all that said, do you know how your mutual fund did? Did it beat its best-fit index in 2016? According to the Standard & Poor’s Index Vs Active U.S. Scorecard (Mid-Year 2016)[1] in the “All Domestic Equity” space only 9.8% of the actively managed stock funds beat the S&P Composite 1500 index over one-year. Soooo… that means 90.20% of those funds LOST to the index! Here’s the best part: The average expense ratio, or fee, for an actively managed stock mutual fund in 2014 was 0.79% annually[2]. The average expense ratio for a passively managed fund in 2014 was 0.20% annually[3]. If you have a $100,000 invested here’s what you paid:

Active: $790.00                                                        Passive: $200.00

Here’s my whole point folks: you’re probably paying more in fees for your active mutual funds than in comparison to your fund’s passive, or indexing, counterpart. Am I saying to ditch your active mutual fund and buy a passive ETF? No, not necessarily. Statistically speaking, some active mutual fund strategies do beat their corresponding indexes. According to the report, 9.8% of them did over the one-year period studied. Those are crappy odds though, aren’t they? I mean you’re paying more than triple in fee(s) and costs for an active manager to do his or her thing, aren’t you? (hint: the answer is yes). What do you get in return for those fee(s) and costs? A less than 10% chance of beating the index on that one-year basis.

In closing, do whatever you want. If you like your mutual funds, by all means, keep them. If you’re looking for ways to squeeze out a little more return, then going with an index fund or ETF may make you some more money. The choice is yours!

Ok, that’s it. I’m done.

Investing in mutual funds involves risk, including possible loss of principal. Value will fluctuate with market conditions and may not achieve its investment objective. Mutual fund shares are redeemed through the fund company at NAV. An investment in Exchange Traded Funds (ETF), involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors. Although ETF shares may be bought and sold on the exchange through any brokerage account at a price higher or lower than NAV, ETF shares are not individually redeemable from the Fund. Brokerage commissions may apply. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

 [1]http://us.spindices.com/resource-center/thought-leadership/research/http://us.spindices.com/resource-center/thought-leadership/research/

 

[2]http://news.morningstar.com/pdfs/2015_fee_study.pdf

 

[3]http://news.morningstar.com/pdfs/2015_fee_study.pdf

 

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