Dan Solin's Newsletter, February 23, 2017
The One Question Every Broker Dreads
Here’s the question I want you to ask your broker about actively managed mutual funds: What are the odds this fund will beat the returns of a comparable index fund over a 10 and 20-year period? It’s important to insist on a response in writing.
Here’s what’s likely to happen: You’ll never get one. The broker will have a lot of excuses (like “my compliance department won’t let me”), but the real reason for dodging this question is because the answer is devastating to the business model of brokers. They understand that, if you knew the data, you wouldn’t own any actively managed mutual funds.
According to an excellent white paper from Vanguard:
Here’s what this data tells you (and what your broker hopes you won’t learn). Your chance of selecting an outperforming mutual fund over a long period of time is exceedingly small. Even if you are successful, you will have to hold on to the fund for a number of years of underperformance. It will be a rocky ride, with an uncertain result.
The road to reaching your retirement goals is paved with low management fee index funds. The road to your broker reaching his or her retirement goals depends on persuading you to ignore the data and buy expensive, actively managed funds.