White Paper | Why Mutual Funds Are The Wrong Way To Go

Why Mutual Funds Are The Wrong Way To Go

Most mutual funds are totally over-diversified. It is very common for mutual funds to hold sixty to one hundred different positions in them. Statistics show that if you throw a dart thirty five times against a wall containing all S&P 500 stocks and hold on to that portfolio, that your returns over time would track the S&P 500 within 3%. By holding a large amount of securities within a specific guideline, most mutual funds are basically closet-indices, which makes it extremely difficult for them to outperform. Mutual fund companies are obviously aware of this, so they invest a tremendous amount of money and time to market themselves and build relationships with clients. Poor performing funds are often shutdown and new funds are created to make for an easier sales pitch. The reality is that most market participants would be more successful in an index fund than with an active mutual fund manager. There are some notable exceptions such as Bruce Berkowitz’s Fairholme funds, Martin Whitman’s Third Avenue funds, among others, but in general market participants can do better in an index fund.

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