About 63% of actively managed mutual funds deliver inferior returns compared to the in a given year. Over a five-year period, about 78% of fund managers underperform. Those jaw-dropping stats come courtesy of the semi-annual SPIVA Scorecard, which compares how active fund managers perform relative to their benchmark indexes.
These lackluster results are often used to discourage retail investors from picking their own stocks. How can you, an ordinary investor, outperform the stock market when even the brightest minds on Wall Street can't? Well, it turns out that you have a few key advantages over professional fund managers.
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1. You can invest while there's real growth potential
One edge you have over big mutual funds: You can invest in small-cap stocks, those issued by a company with a market capitalization between $300 million and $2 billion. They're worth less than the blue-chip stocks you'll find in much of the S&P 500 index, but they have greater growth potential. The risk is higher, but they historically deliver superior returns compared to mid- and large-cap stocks.
Mutual funds are often too large to invest a significant amount in any given small-cap stock. The SEC prohibits any fund from acquiring more than 10% of an individual stock's voting securities.Without those rules, a single fund could rapidly drive prices up and down when they buy or sell shares of a small company.
If you can correctly identify an up-and-comer, you can earn a hefty profit by investing while the stock is still a bargain. The real growth happens before mutual funds are allowed to join the party.
2. Their fees eat up your returns
Investment managers don't work for cheap, and they still get paid even when they deliver inferior results. Actively managed funds have an average expense ratio of 0.66%, according to Morningstar's 2019 Annual Fund Fee Study, compared to 0.13% for passively managed funds, which try to match a benchmark index's performance.
The difference may seem minor, but it adds up over time. If you invested $5,000 a year in a fund with an expense ratio of 0.66% and earned 8% annual returns, you'd pay $2,800 more in fees over a 10-year period than you would if you stuck with the fund with the 0.13% expense ratio. But it doesn't matter whether the fund delivers 8%, 12%, or 0% over time; as long as you keep investing, the fund manager gets paid.
3. You can afford to ignore short-term results
Investors are more likely to react to short-term underperformance, so fund managers can't afford not to take a short-term perspective. Morningstar research manager Michael Laske found in 2019 that the average actively managed domestic stock fund has an annual turnover of 63%. That means that a mutual fund made up of 100 stocks would replace 63 of its holdings in a given year.
Often driving the high turnover is a phenomenon known in the world of mutual funds as "window dressing," where managers shop for the trendiest stocks at the end of the quarter -- when funds with more than $100 million in assets under management have to disclose their holdings -- to make their portfolios look good to investors.
The most successful investors only invest with a long time horizon of five to 10 years or more. When you take a buy-and-hold approach, you can ignore the noise that comes with fads and short-term volatility to focus on long-term results instead.
Should you try to beat the market?
If you don't have the time or expertise to pick your own stocks, you're better off sticking with low-cost index funds and aiming for returns that are on par with the overall market. But if you have the knowledge and risk tolerance to buy individual stocks, there's no reason to be deterred from doing so, especially if you're well-versed in a particular industry or sector.
That doesn't mean you should have all your wealth invested in a few small-cap companies that you believe have the potential to become the next Amazon or Netflix. A better strategy: Aim for returns similar to the overall market with your retirement savings by investing in index funds. You can use your regular brokerage account to buy stocks that you believe have huge upside potential without putting your nest egg at risk.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Robin Hartill, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Netflix and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
FAQs
MY SUMMARY AS OF MARCH 31, 2024:
The average return of all 530+ Motley Fool Stock Advisor recommendations since the launch of this service in 2002 is 674% vs the S&P500's 154%. That means they are now beating the market by OVER 4X since inception.
Can active fund managers beat the market? ›
International developed stock fund managers were able to beat their respective indexes in four of the past 23 years, or 17.4% of the time. Meanwhile, emerging markets active fund managers fared even worse. They only managed to outperform in two years, or 8.7% of the time, during these 20-plus years.
What percentage of fund managers outperform the market? ›
The SPIVA scorecard found that just 40% of large-cap fund managers outperformed the S&P 500 in 2023 once you factor in fees. So if the odds of outperforming fall to 40-60 for a single year, you can see how the odds of beating the index consistently over the long run could go way down.
Is seeking alpha better than Motley Fool? ›
The Motley Fool is ideal for beginners to intermediate investors looking for growth-focused stock recommendations and straightforward advice. Seeking Alpha suits more experienced investors who value a wide range of analytical perspectives and detailed data.
Does the average investor beat the market? ›
Key Takeaways. Figuring out whether you can beat the market is not easy one, but the answers generally vary depending on who you ask. The average investor may not have a very good chance of beating the market. Regular investors may be able to achieve better risk-adjusted returns by focusing on losing less.
Has any investor beaten the market? ›
Household names like Peter Lynch and Warren Buffett achieved their successes by picking individual stocks. Many individuals you've never heard of have attempted similar strategies and failed. Even most professional mutual fund managers can't beat the market.
Has anyone outperformed the S&P 500? ›
DexCom, Inc. (NASDAQ:DXCM) and Medpace Holdings, Inc. (NASDAQ:MEDP) are the only two healthcare sector companies that have made it onto our list of 13 stocks that outperform the S&P 500 every year for the last 5 years. The shares of DexCom, Inc.
What percentage of financial advisors beat the market? ›
Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.
Why is it difficult for fund managers to beat the market? ›
There is at least a half-dozen reasons why this is the case. The massive size of funds that are actively managed by the industry's behemoths – Vanguard, Fidelity, Schwab, Blackrock and so on – means they cannot beat the market because they are the market.
How many managers beat the S&P 500? ›
Unsurprisingly, the majority do not beat those benchmarks, and even the ones who do don't keep their lead for long. Over its 23-year history, the SPIVA report shows that, on average, 64% of active large-cap fund managers fare worse than their benchmark (the S&P 500) in any given year.
The Needham Aggressive Growth Retail fund beat the S&P 500 index over the past one-, three-, five- and 10-year periods. Its 10-year average return was 12.78%.
How many actively managed funds beat the market over 20 years? ›
Over the 20-year performance horizon, the success rate is as low as 5%. The investment implication, as it so often is, is to invest the bulk of your portfolio in index funds. Investing in an actively managed mutual fund or ETF represents a triumph of hope over experience.
Is Zacks or Morningstar better? ›
Which is better: Zacks or Morningstar? Zacks provides more tools for screening and quantitative analysis. But Morningstar offers in-depth, qualitative fundamental analysis on stocks and funds. Different investors will prefer one over the other depending on their focus on qualitative vs.
Is Zacks better than Seeking Alpha? ›
Zacks is better for earnings estimate-centric analysis. So in summary, while both Seeking Alpha and Zacks cater to investor research needs, they are optimal for different analysis styles. Identify whether you prefer diversity of qualitative opinions or purely quantitative models to make the right choice.
What is Motley Fool's top AI stock? ›
The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
What is the best stock picking service? ›
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The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, and Uber Technologies. The Motley Fool recommends the following options: short March 2024 $67.50 calls on PayPal.
Which mutual funds consistently beat the S&P 500? ›
10 funds that beat the S&P 500 by over 20% in 2023
| Fund | 2023 performance (%) | 5yr performance (%) |
|---|
| MS INVF US Insight | 52.26 | 34.65 |
| Sands Capital US Select Growth Fund | 51.3 | 76.97 |
| Natixis Loomis Sayles US Growth Equity | 49.56 | 111.67 |
| T. Rowe Price US Blue Chip Equity | 49.54 | 81.57 |
6 more rowsJan 4, 2024
Best Stock Research Websites – Runners Up
- Empower Portfolio Analyzer.
- Motley Fool.
- Motley Fool Stock Advisor.
- Finviz.
- Zacks Investment Research.
- Seeking Alpha.
- ValueInvesting,io.
