Mutual Fund Returns: Don't Follow the Herd

From 1962 through the third quarter of 2009 the S&P 500 had an average annual return of 8.71%; the weighted average US mutual fund was up 1.18%. (By weighted we mean adjusted for the funds’ sizes. A $100mln fund that is up 50% should not offset the $5bln fund that is down 50%. The mutual fund business will then tell you that the average fund is flat, but while not wrong, that is misleading.)

Investing in the biggest, best, and fanciest funds did not pay off.

click to enlarge

(The green line represents mutual fund performance, the blue line represents total sales - inflows minus outflows.)