The Goal

The goal is to put cash in your pocket. It is not to own A mutual fund or mutual funds.

85% of mutual funds fail to add value to a portfolio compared to using index mutual funds or index Exchange Traded Funds (EFTs). You must monitor performance of your mutual fund versus its benchmark indices and peers, and perhaps, periodically change them, just as you would do with stocks.

The relative peer benchmark for mutual funds is to (1) outperform peers over a 3-5 year period and (2) to be ranked 5 stars (top ranking) in its style category (e.g. value, growth, blend, large, mid or small cap etc.) by Morningstar or a similar rating service.

A potential benchmark for US. stock mutual funds an 11 percent per annum return (which is the long term return of the S & P 500)...This benchmark is realistic and helps to avoid being greedy.

My personal goal is to do better…

Is it worth the time to find mutual funds that perform better than their index?

The following table shows how much more money you will have if you invest just $1,000 p.a. and earn just 1% more than the S&P 500 index by picking top performing mutual funds. If you think that you can pick managers that perform 2% better or if you invest $2,000 p.a., gross these numbers up accordingly. For example, by picking good mutual funds that earned 13% p.a. vs 11% p.a. on the S&P 500, your $1,000 p.a. investment over 40 years, would produce $352,200 (2 x $176,100) more money than investing in the index. Another example: Saving $2,000 p.a. from age 25 to age 65 (40 years) would result in a total investment at age 65 of $1,535,828 (2 x $767,914) which is $352,200 (2 x $176,100) higher than earning the S&P 500 return of 11% p.a. (Note the power of compound saving plus compound returns.)

Number of Years Investing $1,000 p.a.	Ending Investment with S&P 500 earning 11% p.a.	Ending Investment earning 12% p.a.	Difference $	Difference %
5	$ 6,227	$ 6,352	125	2
10	16,722	17,548	826	5
20	64,202	72,052	10,850	17
30	199,020	241,332	42,300	21
40	581,826	767,914	176,100	30
50	1,668,771	2,400,018	731,200	43