facebookWhy do people still invest in mutual funds even if there are so much academic research showing that they are not consistent in beating the market? Shouldn't we all just move into passive investing? - Seedly
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Anonymous

Posted on 18 Feb 2019

Why do people still invest in mutual funds even if there are so much academic research showing that they are not consistent in beating the market? Shouldn't we all just move into passive investing?

I've recently been reading up on many articles and books on investing, such as "a random walk down wall street" by Burton G. Malkiel, and they have provided strong evidence that mutual fund performance is not consistent and is at best, on par with the market, discounting transaction fees and other hidden costs. So why are mutual funds even still existing in the first place? shouldn't they become obsolete since we are able to do so much better with a passive index fund strategy?

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7 answers

Discussion (7)

There's a Chinese saying - 画蛇添足 (which means to draw feet on a snake). I think it's human nature to feel like doing "more" equates to a more meaningful output. In this case, when you invest in a mutual fund, you're paying more fees and hence, you have the perception that the intrinsic value of your investment is higher (even when it's really not)! Passive investing might seem too "easy" for some, maybe?🧐

This also isn't directly related to your question, but I do believe that there are some ETFs actively managed by funds that are worth looking at, especially if you're unable to afford an entire share of a company. For instance, ARK's ETFs have had a decent performance over the past year ~

1

Frankie Rappaport

Frankie Rappaport

25 Oct 2020

True. maybe the success of ARKs must be reevaluated in 5 years? I hold ARKG, but according to (my) theory it should not be better than passively managed biotech funds ?

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Frankie Rappaport

Frankie Rappaport

Level 16. Sage

Updated on 26 Feb 2020

Hello, eccellent question!

I clearly am an passive investing proponent, though still holding some (mostly tech stocks), no mutual funds (1 exception). If I would compare my single tech stocks aggregate portfolio against a tech stock index then I would probably see that I'm not a successful active stock picker either. Probably 'separation anxiety' because of my general buy & hold forever attitude, that I did not yet sell my tech single stocks?

That there are still somany mutual funds alive has many reasons:

-particularly the seniors are not well informed, feel helpless and hand their funds to the perceived 'expert' finance pros who then do what they like

-the better informed receive biased information from the finance pros or negative 'caveats' on ETFs

-but I see also on this Seedly board that some of our colleague advice givers here are in favor of potentially dubious/risky instruments like mutual funds, options, day trading etc., sorry ....

I totally agree with you that nowadays passive indexing via large low cost ETFs is the number one vehicle for retail investors that want to buy equity.

Recently, at least, I read somewhere thst maybe with bonds active management could be successful? I will not buy bonds or bond mutual funds.

Then (honestly no covered advertising intended!) I still own a single mutual fund: 'Core Ny Teknik' from Sweden.

https://www.morningstar.se/Funds/Quicktake/Overview.aspx?perfid=0P0001FLH9

It is a nordic countries tilted actively managed technology fund with mutual fund-typical relatively high annual fee (1.5%). I did this because the two person management team left a similar fund of Swedbank bank, where they demonstrated the best Sweden mutual fund performance over many years. Also because I wanted to diversify into scandinavian countries (though this mutual fund also holds U.S. stocks), because I believe in technology stocks and because the managing team to me seems credible, communicates openly and has this incredible track record.

Downsides: it is denominated in Swedish Krona (SEK) prone to relatively high inflation losses, my broker charged me very high transaction costs, the mentioned annual expenses and generally the risk associated with tech sector investing.

more on my thinking:

https://seedly.sg/questions/what-is-your-general-investing-philosophy-strategy​​​

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Post

Davin

Davin

Level 12. Master

Posted on 26 Feb 2020

Actually there are many low cost mutual fund available in US market like VTSAX. They are VTI equival...

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