The saying “80% of fund managers can’t beat the index” has some merit. Here are a few reasons why you should be prudent when considering mutual funds:
1) “Migrating Managers“: when a fund manager seems to have the Midas touch, every fund company wants to poach him/her.
2) “Asset Elephantiasis“: when a fund earns high returns, investors take notice and pour hundreds of millions in in a matter of weeks. That leaves the manager with few choices – all of them bad: a) keep the money safe, but investors will complain b) buy already owned stocks, but they have prob already made their gains and will become dangerously undervalued c) buy new stocks that he didn't like well enough to own already.
3) Expenses: it costs more to trade stocks in very large blocks than in small ones. With fewer buyers and sellers, it’s hard to make a match.4) Fees: once a fund becomes successful, the managers don’t want to rock the boat. This is contrary to how how they made the fund successful, and now they just want to enjoy the lucrative fees.
5) Fees: Mgmt fees and loads.
If you do really want a managed fund, these are the things to look for: their managers are the biggest shareholders, they are cheap, they dare to be different, they usually close the door to new investors, they don’t advertise. Consider Index funds & ETFs.
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