When you buy a mutual fund, if you’re like most sane people, you expect said mutual fund to do a good job with your money. And by a good job, (for the purposes of this article) I mean beat its index. The two most well-known indices are the Dow Jones Industrial Index and the S&P 500. So, if an actively managed stock mutual fund doesn’t beat its index, is it worth owning? This is 2019, and investors have a boatload of investment choices they can buy that simply copy and index, rather than trying to beat it. Plus, those investments generally carry lower fees and expenses as well.
Traditional active mutual funds have been around since the roaring 20’s. There’s nothing wrong with that, but this isn’t the roaring 20s anymore. You have oodles of solid investment choices out there. Rather than drone on about this, let’s take a quick look at how well active mutual funds did in 2018, shall we?
Check this out. About 35 percent of actively managed mutual funds that buy large-cap U.S. stocks beat the S&P 500 Index last year. If we flip that statistic, that means 65 percent of large-cap U.S. stock mutual funds lost to the S&P500 in 2018. Not very good odds if you’re a domestic stock mutual fund owner. The odds get even more grim if you consider that there are 839 large-cap active mutual funds in the U.S. Can you tell me which of those 839 mutual funds will beat its index in 2019? Since my business card doesn’t say ‘Fortune Teller,’ I’m certainly not going to try.
Well, if you currently own active domestic equity funds, what are you supposed to do? Sell them all and start over? I definitely wouldn’t suggest that. Not on one element alone. There are many factors you should consider before chucking an investment.
Here’s what I think you should do: get to know your mutual fund(s). Contact your financial advisor (or your financial institution) and find out the following three things:
- What fee(s) you’re paying to own your mutual fund(s).
- Find out what taxes you may be paying due to your mutual funds (if any), and what taxes you may have to pay if you make a change (if any).
- Find out if your mutual fund(s) is beating it’s ‘best-fit index.’
After you gather all that information, make an informed decision if you want to keep them or not. The average fee to own an active domestic stock mutual fund is 0.78% each year. Does the performance justify the fee you’re paying? You make the call.
With that said, if you’d like some advice from a CERTIFIED FINANCIAL PLANNER™, contact me and I’d be happy to help you make that decision.