December 22, 2020
What is my overall take on mutual funds? Should you invest in them? Or are they a waste? In this episode of Hey Peoria! Let’s Talk Money, I wrap up the series on mutual funds and share my assessment. I’ll talk about some research from the SPIVA U.S. Scorecard that will shed some light on how different mutual fund sectors perform. After we walk through the numbers and get the big picture, I’ll share my hot take on this type of investment. What’ll my answer be? Listen to find out!
Outline of This Episode
- [3:00] Domestic stock fund performance
- [8:44] International stock fund performance
- [10:20] Bond fund performance
- [14:30] My overall take on mutual funds as an investment
Domestic stock fund performance
There are over 7,000 mutual funds out there and a large majority are stock funds. Twice a year, the SPIVA U.S. Scorecard comes out. The scorecard is a research report on mutual fund performance. So I’ll be sharing the percentage of mutual funds that did NOT beat or outperform their benchmark.
In the domestic stock fund category—on a yearly basis—67% of funds underperformed the index. On a three-year basis, 70% lost to the index it was following. At 15 years, 87% underperformed the stock they were tracking. What does that mean?
In any given calendar year, it’s a coin flip to see if your stock fund will beat the index. The further you go out, the worse it gets. Over a 15-year timespan, only 13% beat the index they were tracking. The longer you own one, the worse your chances get to beat the index.
International stock fund performance
On a one-year basis, 51% of international funds lost to the index they were tracking. Over 15 years, 84% lose to the index. International small-caps funds seem to perform slightly better. On a one-year basis, it’s a 50/50 shot that they’ll outperform the index. On a 15-year basis, you only have a 67% chance of losing to the index fund. So it goes to show that some categories are a little more positive.
Bond fund performance
The long-term government bond fund category is atrocious. It’s a 98% shot of losing to the index. An alternative is the investment-grade intermediate-term funds. They are considered a “safer” bond that is appropriate for the average investor. Why? Because there’s a good likelihood that your investment will get returned to you.
In the bond world, there are short-term, long-term, and intermediate-term bonds. Long term is a 20+ year maturity, intermediate is a 5–12 year maturity, and short-term can wildly differ. It can be 30 days and upward.
The intermediate-term category is about a coin-flip on a one-year basis. On a 15-year basis, it’s a 68% chance of losing to the index. With the global income fund category (that includes stocks from the US), 73% lost to the index it was tracking. Over 15 year, it’s 62%.
My overall take on mutual funds as an investment
Mutual funds are usually a diversified option, which is a positive. They’re also fairly easy to understand. They’re simply a bucket that houses a group of investments with a common purpose. The common purpose of a global income fund is to find you a good interest rate on bonds from across the world. The purpose of international funds could be to buy large-cap international companies. They’re also a one-stop-shop. If you like the utility sector, but don’t know what company to pick? A mutual fund may be a good idea. So what’s my hot take? How do they compare to ETFs? Listen to the episode to find out!
NOTE: This is all public research. I’m not sharing a secret research project. You can access the PDF linked below to see the report.
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