| Most investors attempt to beat the market at | | | | opposite is true, in fact: top performing funds in |
| some point in their investing career. Some | | | | any given year tend to bring up the rear of the |
| investors delve into picking individual stocks and | | | | performance lists the following year. The experts |
| others try market timing, but the most common | | | | are virtually unanimous on this matter: it is |
| way new investors try to beat the market is | | | | impossible to know which actively-managed |
| buying actively-managed mutual funds. Many | | | | mutual fund will outperform going forward. |
| people think by looking at a fund manager's past | | | | The solution to this problem, of course, is to |
| record or carefully examining mutual fund | | | | invest in a balanced portfolio of broadly-diversified, |
| statistics and ratings from companies such as | | | | low-cost index funds. With index funds, you are |
| Morningstar or Kiplinger, they can identify ahead | | | | guaranteed to match the performance of the |
| of time which fund managers are likely to beat | | | | overall market minus its razor-thin expense ratio. |
| the market's return going forward and allocate | | | | Doing the math based on what we already know, |
| their portfolio accordingly. This is a fool's errand. | | | | it is likely index funds will beat the performance of |
| Study after study from such diverse sources as | | | | 70% of all actively-managed mutual funds over |
| Morningstar, Ibbotson and Associates, and | | | | time. That said, trying to beat the market is |
| academics at finance schools all over the world | | | | exciting and many investors will attempt it no |
| confirm most mutual funds do not and cannot | | | | matter what the experts say for the same |
| outperform the market. Over any given period, | | | | reason people gamble in Vegas even though they |
| around 70% of all actively-managed mutual funds | | | | know the odds are against them: it's a lot of fun. |
| fail to beat the market. What's more, the funds | | | | Allocating a small percentage of your portfolio to |
| that do manage it tend to change year after | | | | trying to beat the market with actively-managed |
| year. That is, just because a fund happened to | | | | mutual funds, maybe 10% or 20% at most, can |
| beat the market over the past year or two is | | | | give you a fighting chance at above-average |
| not an indication it will continue to do so. Quite the | | | | returns without much additional risk. |