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Understanding the Mutual Fund Landscape

Listen to Best in Wealth Podcast Episode 243

The mutual fund landscape is complex, with thousands of choices. In fact, at the end of 2023, there were 4,722 US-domiciled funds that we could choose from. Of those, 2,043 were from US equities, 1,124 were international funds domiciled in the US, and over 1,500 were bond funds. 

If you add all the money from these funds, it totals 10.6 trillion dollars. $5.4 trillion is in US equity funds, $2.1 trillion is in international equities, and $3 trillion is in bond funds. Whew. 

If you decide to buy an ETF or mutual fund, you are spreading out your risk (as opposed to buying individual stocks). But how do you choose between the thousands of options? Should you choose between the thousands of options? 

My goal is to help you understand the landscape of mutual funds so you can make informed decisions in this episode of Best in Wealth! 

Outline of This Episode

  • [1:08] Did you fill out an NCAA bracket? 
  • [3:32] The mutual fund landscape
  • [6:21] What is an active mutual fund versus an index fund?
  • [11:28] Actively managed funds aren’t performing well
  • [16:48] Are you an active or passive investor? 
  • [18:02] Is there a better way? 

What is an index fund? 

An index fund is your first option for investing in a mutual fund. An index fund tracks indexes, such as the S&P 500 or Russell 3,000. You are buying “the market.” You will receive the return of that market (minus expenses and tracking error). If you want to do better than an index fund and do better than the average of the stock market, you hire someone to manage it for you (i.e. buy into an actively traded fund). 

What is an active mutual fund?

An active fund is your second option for investing in a mutual fund. You have the option to buy that fund through your brokerage account or 401k. Active funds have a mutual fund manager and a team of people making decisions on the fund’s behalf. The manager is the “expert.” 

They look at all of the publicly traded companies and choose the ones that will be in the fund. That manager and his/her team might decide to sell some of those companies. You are hiring this manager to do well, to beat the market. But how do you know if they are doing well? 

The University of Chicago’s Center for Research and Security Prices is a great place to start. They looked at every single publicly traded company and created indexes to see how the market was doing. They are how we learned that the US stock market averaged a 9% return per year. 

But this throws a wrench in things: It is not looking good for the actively traded funds. 

Actively managed funds are not performing well

On 12/31/13, there were 3,022 funds available to choose from. As of 12/31/23, only 67% of those funds still exist. Why? Those 33% were not performing well. When we look at winners, looking back 10 years, only 25% of the experts beat the market. You only have a 25% chance of selecting an actively managed fund that will beat the market. 

15 years ago, there were 3,241 funds and only 51% of them survived and only 21% of them had beaten their benchmark. Only 45% of the funds that existed 20 years ago survived. Of the 2,860 funds available 20 years ago, only 18% have beaten the market. 

What does this tell me? Actively managed funds are not doing any better than index funds. Chances are, whether you buy into an index fund or an active fund, it is not always the best way to invest. We like to look at things differently at Fortress Planning Group. Stay tuned, because I’ll cover it in another episode. 

Resources Mentioned

Connect With Scott Wellens

Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.