The Wall Street Journal put out an article about the under performance associated with high fee mutual funds. They say:
“Consider the performance difference between high-fee and low-fee active funds focused on large-cap U.S. stocks. Over the past 10 years through the third quarter of 2018, the average high-fee option delivered an average annual return of 10.61% after expenses, while the low-fee option averaged 12.26%—a difference of 1.65 percentage points and a substantial advantage for the low-fee option.”
I’m not coming to defend high-fee (often closet index) mutual funds, but hear me out. A 10.6% annual return for ten years is…pretty darn acceptable. Do I think the average actively managed mutual fund will outperform its benchmark? No of course not, the data is clear on this. But will some funds out perform? Yes, there is a 100% chance that some funds will beat the market.
The reason why investors fail to achieve their financial goals is not by being in a high fee fund, but by timing the market. They get out when risk is apparent and get back in when the dust has settled. We know this is exactly backwards. Risk is most present when you don’t feel it.
High fee funds might not beat their benchmark, but if you can stick with them you’ll be better off than the majority of investors that hop in and out based on how stocks did last month. Market timing has blown a much bigger hole in people’s retirement plans than high fee funds, I think we might be having the wrong debate.
Michael Batnick is a managing partner at Ritholtz Wealth Management. He is the co-host of Animal Spirits, What Are Your Thoughts, and The Compound and Friends. For disclosure information please see here.