“You get what you don’t pay for.” – John Bogle
Some interesting graphs from Vanguard:
The underperformance of active mutual funds is well publicized at this point. These graphs are just another nail in the coffin.
What got my attention with this data is that it shows how many active mutual funds just completely go out of business. Basically, the get shut down or merge with another fund.
The first study shows that only 55% of active mutual funds survived the 15 year period through 2012. Somehow, 36% survived but underperformed. And only 18% both survived and outperformed their index.
The second graph shows how much worse active fund underperformance is once you add in the graveyard funds. Nearly all of these asset classes go to roughly 80% underperformance against their index over 10 years including the dead funds.
In Don’t Count on It, John Bogle informs readers that there were only 49 stock mutual funds in 1945. By 2006, that number had ballooned to 4,200.
He also shared that around 50% of the mutual funds created in the 1990s failed and 1,000 funds failed in the 2000-04 period.
So not only are you competing against simple, low-cost index funds when trying to choose active funds. You also have to dodge the walking dead zombie funds that end up dying.
Mutual fund companies will continue to churn out funds that mirror the hottest performing sector or asset class. If they don’t work those funds will be swept aside for the next revolutionary idea.
Don’t take the bait.
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Couldn’t agree more. I knew that active funds will generally underperform their respective index, but sheesh, that’s horrible when you add in the dead funds. Passive index funds are the way to go if you want a fairly hands off approach to your investing.
Yeah most of the historical performance numbers exclude closed funds. The survivorship bias can be pretty strong. Sometimes it’s like they throw out 10 new funds and see which ones stick and get rid of the rest.
Hi Ben. Thanks for the great post. Do you know of any scenario where active funds are broadly superior or preferred over passive funds? Thanks, Dave
Check out this post from Your Wealth Effect: http://yourwealtheffect.com/when-should-you-not-buy-an-index-fund/
He lists a few funds in the comments section.
Most investors are better off with index funds because even the best active funds can go through 2-3 year periods of underperformance. If you do use active funds make sure they’re very different from the market or index. There’s no reason to pay for a fund that hugs the index.
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