My first day of college -- oh, about 100 years ago -- I recall sitting in the midst of 300 or so other Psych 101 students as the professor explained his grading strategy, why A's would be so hard to come by, and the venerable "gentleman's C" nonexistent.
"Class," he said, "I already know you are all smart -- otherwise you wouldn't have gotten into this college. But my job is to assign grades so as to separate out the truly brilliant from the merely intelligent."
This week, the folks at NerdWallet.com set themselves an even tougher task: to examine 13,000 of the nation's largest mutual funds -- 65 percent of which underperform the S&P 500 index of America's largest stocks -- and cull from this mass the truly abysmal, versus the merely awful.
What NerdWallet came up with is its list of the "Dirty Dozen" -- the 12 worst mutual funds in America. Here they are, held up for your scorn:
Doomed From the Get-Go
Now obviously, we won't be investing in any of these funds, and if you're lucky, you haven't either.
But what can we learn from NerdWallet's rankings? What did these financial titans do wrong that wound up putting them on the equity-naughty list, and getting made fun of, in public, by a bunch of number-crunching "nerds"?
The answers vary. For example, you can probably assume that Rydex was doubly cursed by first trying to short U.S. government debt on the theory that "QE Infinity" would wreck the value of the dollar, then doubling down with a bet on precious metals soaring in value on the same theory.
DWS probably fell into the same trap with its Gold & Precious Metals Fund, while similar bad choices were made at Ivy Global (natural resources commodities) and Oppenheimer (commodities in general). Meanwhile, DWS may have simply picked the wrong Latin American companies to buy, and ALPS the wrong private equity funds to invest in.
However, one thing all these funds have in common (aside from miserable returns) is that they charge way too much for their underperformance.
The average fund on this list charges 2.4 percent in management fees -- that is to say, for every $1,000 you invest in them, they charge you $24 a year, year in and year out, even as they lose you money. Adding insult to injury, you have to recall that the average high-class hedge fund only charges its customers 2 percent (plus a cut of the profits -- of which these guys earn you none).
In the best of all possible worlds, if these funds were able to outperform 65 percent of their brethren and just match the 10 percent annual returns on the S&P 500, those fees tacked on at the end would still eat up close to 25 percent of your profits.
In other words, they'd guarantee that you underperform the market no matter what.
You Can Easily Do Better
So how can you do better? How can you at least beat these 12 losers, and hopefully outperform a majority of mutual funds, overall?
The simple answer is to buy yourself a nice, boring index mutual fund such as the ones rated five stars on NerdWallet's proprietary search engine for the "Best Index Funds." These tend to charge low fees, and generally speaking, anything with "Vanguard" in its name is probably going to be a good bet for you, and likely to stick pretty closely to the returns of the index it's tracking since this fund family is known for its low expenses.
If you're feeling lucky, though, and want to try your hand at locating a better actively managed mutual fund, NerdWallet has a tool for that, too: a list of the "Best Actively Managed Funds." These funds tend to outscore their peers on the profits they make over five-year periods, and charge significantly lower fees than the Dirty Dozen outlined up above.
Where should you start? Well, just taking a quick gander, it appears that funds operating under the Fidelity and American Funds brands tend to score highly on overall profits performance. American Funds scores well, again, on the low fees it charges for its services. So too does Strategic Advisers, which offers a pair of "US Opportunity" funds that have returned mid-teens annual profits over the past five years, yet charge only a small fraction of a percentage point in fees for the privilege.
Whether they can keep up the outperformance is anybody's guess -- but the low fees, at least, should stick. And those alone will set you up to outperform NerdWallet's Dirty Dozen.
A dyed-in-the-wool stocks-only investor, Motley Fool contributor Rich Smith owns none of the mutual funds named -- neither the good nor the bad.
Take the first steps to building your portfolio.View Course »