Apple Inc. (AAPL), Mutual Funds & More

Will you get what you pay for?
Not only do fund managers have trouble beating the market consistently, but they usually charge high management fees. Some of the larger funds have annual management fees under 1% — for example, Fidelity’s Contrafund has an expense ratio of 0.74% — but many mutual funds have an expense ratio around 1.5%. Some funds even charge a fee (or “load,” in the industry lingo) for investing with them: These are essentially sales commissions and further dampen investors’ returns.

Given the limitations that hurt big funds’ performance, even an expense ratio below 1% makes it very challenging to beat the market. Not surprisingly, there are a few outliers that have managed to outperform. Contrafund has beaten the S&P 500 by nearly 3 percentage points over the past 10 years. Still, it’s difficult to maintain that level of performance; looking at just the last five years, Contrafund is even with the market’s rate of return.

Two alternatives
While a few mutual funds may be able to beat the market, it’s essentially impossible to predict in advance who will do well. (After all, strong past performance does not guarantee future gains.) The power of index funds is that they don’t run up big expenses for managers and marketing. The aforementioned SPDR S&P 500 ETF has an annual expense ratio of just 0.09%, a fraction of even the cheapest actively managed funds. For that low price, you’ll almost certainly earn a return just a tiny bit under the market’s return. Given the mutual fund industry’s track record, you’re unlikely to do any better in an actively managed fund.

Alternatively, if you’re willing to invest some of your valuable time as well as your money, you may be able to beat the market as an individual investor. Mutual funds may have high-paid managers with MBAs, but as a small investor, you have the ability to focus on a few stocks that look particularly promising. We at The Motley Fool can help you identify great buy-and-hold opportunities: stocks that are likely to outperform even the best fund managers’ portfolios.

The article Why Mutual Funds Are Such a Rip-Off originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Apple. The Motley Fool recommends and owns shares of Apple.

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