There are a lot of disclaimers for this post that are extremely important. As a result, I have included them at the end indicated like so 1. Additionally, I walk through the math so that everyone can understand the process and for people wanting to critique/question. There is a TL;DR at the end but without context, it's pretty unbelievable.
Sourcing Data
Every list of American Mutual funds has slight errors (even this one). So I created a list with Market Watch of around 25,000 mutual fund tickers. Most mutual funds have multiple different tickers because of different shares/classes. Each class contains the same investments it's just variations on your fee structure 1. So I counted only one example from each mutual fund 2. This is controversial but I believe it will give the most accurate results. This example I would have kept two because there are only two mutual funds here. You shouldn't include every share/class because it will have an overrepresentation of certain mutual funds.
I used the stock history function in Excel to find the price of each ticker on the 1st of every year since 19903. If it didn't have a price I got rid of it for that particular year. For context at the beginning of 2021, I have around 6700 unique mutual funds in my list4.
The Math
I did the following calculations for every American Mutual Fund since 1990 5 Big disclaimer. First I calculated the percent change from each first day of the year to the next first day of the year (2020 Jan 2/2019 Jan 2)-1. Many people calculate change inside of a year but I did the math for gains of a year gap instead. As long as I use the same timeframe every time the math is sound. The percent amounts might be slightly different than what is commonly publicized. Secondly, I calculated the percent change from the beginning of every year from 1990 until now 6 (1990-Now, 1991-Now, 1992-Now Etc.).
I chose these two calculations because one is a very common attribute (year difference) and since most people buy and hold mutual funds for many years I wanted to see what the result would be holding for many years until now. I then calculated averages for these two distinct calculations for each year. As well as trimming 2.5% Top+Bottom and 10% Top+Bottom of mutual funds to exclude outliers and calculating a new percentage with that (keeping all 3 results for each calculation/year).
Index Funds
I chose S&P500 (.INX) Dow Jones Industrial Average (.DJI) and Nasdaq Composite (.IXIC) and found their historical prices via Google Sheets. The same math calculations were done for the same timeframe gaps (i.e single year gaps and each year until now gaps).
Analysis
I started by comparing the 'each year till now' percentages for mutual funds to the three indexes. I can also calculate what percentage of mutual funds each index is higher than in each specific calculation. Here are the results from 1990-Now. It becomes quite apparent that the order of best returns goes Nasdaq, S&P then Dow Jones. Each Index normally beats out 90%+ of Mutual funds for each timeframe (sometimes 98%+). Even if you bought at the peak of the dot-com bubble (2000) or before the 2008 crash, each index would still beat the overwhelming majority of Mutual funds from that same time frame. If you knew to buy any index in the '90s it's a slaughter.
Looking at only this data doesn't take into account a random great year for an index fund. As well there is a common notion that Mutual funds might not gain much but they shield you from losses. Let's address that by diving into the other calculation I did with the percent change from a year to the next year.
Here is 1990-Now. Red cells indicate when an index is lower than the average mutual fund from that year. The results are when the indexes are down the average mutual fund is also very much down (Out of the 8 times S&P closed negative since 1990 4 times it still outperformed the average mutual fund). There has never been a year where any index was negative yet the average mutual fund was positive. The indexes are usually beating 55-90% of mutual funds every year (With them beating 90%+ many times). Dow has beaten the average yearly mutual fund return 66% of the time in the past 30 years, S&P & Nasdaq being 80%. The dot-com bubble is the exception to the stellar performance where a difference between index funds and mutual funds is notable.
Conclusion
Picking a mutual fund that somehow outperforms any index is a massive uphill battle because the indexes usually beat 55-90% of mutual funds every year (with them beating 90%+ many times). Normally you hold mutual funds for many years, so even if you succeed in choosing a winner one particular year you will still eventually lag behind the index funds. The longer timeframe the more likely (Index funds beating 92%+ of mutual funds over time is the norm)
You can make a lot of observations from this data and that's what I am going for. Make your own conclusions but keep in mind most statistics relating to the mutual fund world are not primary sources. Most of the time people are trying to convince you to buy Mutual Fund XYZ. This post is primary research where you could easily replicate my findings.
The biggest flaw to this data is the fact that we've been in a record bull market which means aggressive investments look better in hindsight. That's why looking at both calculations I did is important, so you can see a clearer picture. You could easily do much more math to find patterns before the current record bull market. For example, calculate percent changes from various timeframes such as 1990-2018, 1991-2018 or 1990-1995, 1991-1996 or 1990-1992, 1990-1993, etc. I can calculate and post some of them if people request them. This is not financial advice.
TLDR
The overwhelming majority of mutual funds can't compete with either Dow, Nasdaq, or S&P any way you slice the data. They don't come close to competing in terms of gains and still perform badly in years when the index funds perform badly (they sometimes perform even worse during these years, the dot-com bubble is the exception). You get roughly the same amount of losses but with only a slight portion of the gains. Even if you choose a mutual fund winner one year your multi-year investment will eventually lag behind the index funds by quite a lot.
Disclaimers
1 Some load the fees in the entry, some in the exit, some on a yearly percent basis, and some in other forms
2 Choosing just one was difficult but I tried to choose Class A if possible. If not possible then B, if not then C, then D, etc.
3 Occasionally Excel would give a unique error on the first trading day of the year to some mutual fund tickers. So I would alter the queried data to the next historical trading day.
4 There could still be mutual funds that Market Watch doesn't document and/or Microsoft cant query. This is a dilemma that I decided to ignore. There is just no real way to get around this.
5 Flaw in my data here is that I can't find old historical lists of mutual funds while also finding the historical prices of said mutual funds. I can only find a current list of mutual funds and historical prices of whatever is currently listed. This is an example of survivorship bias because I won't have the data for any mutual funds that were available but delisted before 2021. As I move further back in time my original list of 6700 mutual funds shrinks every year. If I had to guess this influences my results in my post to be slightly higher returns than the truth. This is because any mutual funds that performed horribly and delisted before 2021 wouldn't be included in my math above.
6 When I say 'Now' I mean September 24th specifically.
Submitted October 04, 2021 at 06:22AM by guanciallee https://ift.tt/3moC7m4
