In an interview with Newsweek about his latest book, a personal finance tome called Stay Mad For Life, Jim Cramer spoke out against the conventional wisdom about managed mutual funds:
Your book provides another departure from conventional wisdom. Lots of advisers believe actively managed mutual funds are a suckers' bet, since few managers can beat the indices year in and year out.
I myself was part of that orthodoxy. But when I look at the returns of hundreds of mutual funds, there are some managers who have done a great job. And everyone I talk to wants advice on mutual funds. An S&P 500 fund is OK if you don't want to spend the time. But there are some remarkable funds.
The basic argument against managed mutual funds was popularized by John Bogle, the founder of Vangaurd and inventor of the index fund. Hiring a professional money manager to invest investors' money detracts from the returns: managed funds nearly always have higher expense ratios than comparable index funds. Add in the unfavorable tax consequences of owning a fund that trades frequently and you have to beat the market by a lot to outperform an index fund with a managed fund. History has demonstrated amply that very, very few funds are able to do this and it is almost impossible to devise a way to predict which ones will.True: some investors and newsletters have done very well picking mutual funds that outperform the market. These are the exception. And even the ones that do outperform tend to do so by a very small margin -- it's difficult to shoot the lights out when you can only put 5% of your fund in any one stock. Unless you're managing a large amount of money or happen enjoy studying mutual funds (In which case I would recommend renting Gigli, or perhaps buying the Full House DVD box set)), the amount that you'll stand to earn by picking a fund is not worth your time after you factor in the high probability that you won't be able to find a fund that beats the market.
Another problem with trying to pick funds is that it makes it more likely that you'll hop around and try to chase performance. Studies have shown that this leads to serious underperformance, and simply investing a fixed amount in index funds each month is a good way to avoid this.
I don't think Jim Cramer's wrong, and there's certainly an argument to be made that the case for index funds above all else has been overstated. But they're still a much, much better option than what the majority of people do with their retirement money.
If you do decide to try your hand at mutual fund picking, Fortune has a good list of six standout funds.
How to Buy a Car
How to get the best deal and buy a car with confidence.View Course »