[masraum]

Originally Posted by lukeh

I've never followed this line of thinking. If after all fees and charges a managed fund consistently beats the index fund why would I want to put my money in the index? Look up these two managed funds (PYSCX and PVSCX) and compare them to a low cost Vanguard S & P index ETF (VOOV) over the past 5 years. Why wouldn't I pick the managed fund? Sometimes the best costs more. What do I care as long as I end up with more in my pocket?

For me, 5 years does not demonstrate long term, consistent results. Five years is a blip. I think about long term as being 20, 30 or 40 years. Lots of funds can beat the market in short periods here and there. If those funds are beating the market long term, then, yeah, they may be worth the premium. But, if they beat the market like a red-headed stepchild for 5 years, and then drop down to a normal level for a few years, and then drop below the market for a few years, you aren't making money unless you sold them before they dropped, and you're still paying the expert his high fees.

I have a hard time paying the experts high fees when pretty much everything that I've read indicates that over the long term, active investing doesn't beat the market, especially when you factor in the costs.

How the mutual fund graveyard can hurt investors - CBS News

The tendency for mutual fund companies to drop poorly performing funds when calculating historical return data is a major problem for unsuspecting investors, and it's known as survivorship bias. An investor selecting mutual funds today is choosing from a list that excludes the losers that have been either closed or merged out of existence so that their poor returns disappear.

For example, Morningstar reported that of all the traditional U.S. mutual funds operating in 2004, 40 percent had shut down before 2014. Perhaps even more surprising, Morningstar also found that of the funds it rated five-stars in 2002, 20 percent didn't survive the decade. And an astonishing 61 percent of the one-star funds survived the full 10 years.

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Understanding how survivorship bias affects the odds of success in selecting actively managed funds that will outperform in the future is an important issue. Vanguard's research department looked at this problem in a study that covered the period 1997-2011. I believe many investors will be surprised at how big a problem survivorship bias is. Here's a summary of the findings:

Just 54 percent of the funds managed to even survive the full 15 years. The rest (2,364 funds) were either liquidated or merged into another fund in the same fund family, in some cases more than once.
As you would expect, the leading cause of fund failure was underperformance. Funds that failed were experiencing negative cash flows at the time of closure, as investors responded to the poor performance.
Investors had a 79 percent chance of picking a fund that underperformed, was liquidated or had a life cycle that was too convoluted for them to disentangle. For large growth funds, the odds of failure were even higher, at 82 percent. For large value funds it was slightly better, at 73 percent.