Why is it better to have a mutual fund that equals or outperforms the S&P 500?

Question

If it's making money, why does this matter?

Answer 1

Because benchmark returns are what you could get if you did absolutely nothing. If you can't get the same returns as a passive investor then you have actually paid a manager to destroy value.

Answer 2

HERE ARE THE FACTS TO ALL YOU ROOKIEZ OUT THERE. Loaded funds, high turnover rate, 2% 12-b1 fees, 1.5% brokerage level expenses and everything else that is in there that I havent mentioned dont matter a lick if the manager is consistently outperforming the index with the same or lower beta. There are hedge funds that have returned in excess of 20+% that are 2-20 (meaning 2% expenses and 20% of profits to the manager) Why buy an index fund that has even a .05% 12b1? You will underperform the index every single freaking year by the 12b1 fee never fail. For all you Vanguard Index lovers out there, I hope you can make sense of this. Good investment advisors, fund managers and portfolio consultants know that a well constructed portfolio with many asset classes (even if you use ETFs this is possible with the right asset class mix) will on average outperform the S&P500 NET OF <<>> FEES consistently.

Look at a fund like Davis New York Venture. Go to morningstar and run a hypo on 100k invested in A shares (and YES GO AHEAD AND PAY THAT DEPLORABLE 5.75% Front end load) in NYVTX and compare it to the ending value of 100k invested in SPDRs. Net of fees, NYVTX blows it out of the water. If you dont believe me email me and I will send you a morningstar hypo to prove it. Better yet go to davisfunds.com and see for yourself.

To answer your question and not to rant....it is important to have a mutual fund that outperforms the S&P500 because even if the SP is growing, you are giving up returns by being in a fund that will never outperform the index it is supposed to track.

Answer 3

Investing is a zero sum game. It is a proven fact that mutual funds are outperformed by the S&P more often than not, BEFORE fees. In the long run, you are better off owning an index fund with a minuscule expense ratio.

To directly answer your question, obviously the higher the returns the better. But that is not to say past returns equal or even suggest future returns. There is a common trend in investing, including fund management, known as reversion to the mean.

Answer 4

You see the statement on every mutual fund advert:
"past performance is no guide to future performance" etc. then they tout the past performance! So what guarantee do you have that your "performs-better-than-the-index" fund will continue to do so? None.

Actively managed portfolios will have higher trading expenses, most probably higher turnover, and will be less "tax-efficient" because you have to pay the capital gains tax for the fund on realised gains. Index funds have lower expenses because the component stocks do not change that often so you don't have a manager actively trading stocks every day to pay for.

I use ETF instead of mutual funds but you should look at the "house take" or expenses before picking a fund AND look at the "after-tax" return.

Answer 5

Why are you thinking in the world of mutual funds? Have you heard about SSO? It's an exchange-traded fund that invests in S&P500 call options.

When you buy SSO, your money goes up 2% when the S&P500 goes up 1%. And of course, if the S&P500 goes down 1%, your money goes down 2%. So, buying SSO at the bottom of a bear market is better than investing in the S&P500 index.

In the past 10 years, the S&P500 index rose 100%. If you want to invest in the S&P500 index, then all you have to do is buy SPY. SPY is the symbol of the fund itself. When you buy SPY, you automatically invest in 500 companies, but in your portfolio, there will be only one symbol - SPY.

Mutual funds like to compare their performance to SPY because SPY has a really good performance which is hard to beat!

If your investment equals or outperforms SPX, that means your investment doubles in 10 years or less.

(Note: S&P500, SPX, and SPY are the same thing. SPX is the symbol of S&P500 index. The only difference between SPX and SPY is that you cannot buy SPX, because that's just an index whereas SPY is an actual fund which you can buy.)

Answer 6

The reason it matters is because you have the option of buying an s&p index fund. So any other fund you buy instead is actually worse of a decision. It is hard for fund managers to beat it so unless you really know what you're doing, the majority of the time buying the index fund is not a bad idea.

Here's a page for finding a good good mutual fund to invest in:
http://www.best-stock-trading-systems.com/mutual_fund_ratings.html

Answer 7

Over long periods of time the S&P500 index beats 80% of all mutual funds. Simply stated, after 20 - 40 years of investing the difference could be a good retirement vs. one where every penny has to be watched......

Learn retirement investing this year. It's not that hard, you'll get the idea after a couple of good books. DON'T RUIN YOUR FUTURE!