The world of stock market investing is extremely glamorous. This is why many everyday investors have chosen actively-managed mutual funds to handle their investments. They try to get in the hot fund that had amazing returns last year. Unfortunately, this often leads to inferior investment returns.
The stock market is usually portrayed as where someone smart can make a good amount of money. So why not have a financial wizard manage your investments? This is the sales pitch of mutual fund companies. Unfortunately, things are not so simple. Many funds will be able to brag about their investment returns over the past few years. But these numbers are often due to luck. It is very important to note that very few managers outperform the market in the long run (over ten years).
Lets not forge about fees. All mutual funds charge an annual fee percentage. This is often referred to as the expense ratio. Some also charge fees to compensate brokers for marketing them (front-end load funds). These fees might seem small in the big picture. But remember that very few funds outperform the market in the long run. And the effects of compound interest makes these small fees add up to a large number over time.
This is why retail investors are increasingly favoring no-load index funds. Instead of focusing on beating the average these funds try to make the average while keeping fees extremely low. And since the vast majority of funds underperform the average in the long run, the retail investor that invests in these funds will outperform is less informed peers.
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