Actively-managed mutual funds are the next Blockbuster Video

Did everyone in America listen to countless personal finance blogs, forums, Frontline, and Jack Bogle? It certainly looks that way. In droves, investors are choosing cheap ETF’s and index funds over actively-managed funds where supposedly a bunch of people far smarter than you will help you outperform the market.

The value proposition of managed funds is a familiar pitch, repeated ad nauseum across the industry. Pictures of sailboats, golf courses, and happy grandkids adorn glossy brochures and websites heavy on words like “independence” and “security.” Dig into the individual funds, and you’ll find a combination of confusing language (terms like “leveraged short-term duration municipal bond arbitrage” are not meant to understood by everyday investors) and soothing prose designed to convince potential investors that its managers are indeed very, very smart sonsofbitches.

It’s a convincing spiel. Exhaustive research. Teams of diligent analysts on-location at the offices and factories of publicly-traded companies. Geeked-out quantitative math modeling. Boutique managers specializing in narrow niches. It all sounds very impressive. And hey, some of those funds do outperform the market sometimes.

The big problem? The actively-managed pitch is a lie. An utter lie.

From 2008–2013, only twenty seven percent of fund managers managed to match or outperform their benchmark indices. Was this dismal performance an aberration?

Not by a long shot; it’s just par for the course.

The fact is, you’d be better off simply buying a passive fund or index-tracking ETF that tracks the S&P 500. The track record is clear: actively-managed funds which typically charge fees of around two percent, don’t reliably outperform passive funds — typically with fees closer to .2 percent — that simply track the movement of the stock market.

Where do those extra fees go? To pay the six-and-seven-and-eight figure salaries of those supposed geniuses managing the funds. To pay for brochures and websites that bring more innocent investors into the fold.

This is no geeky financial minutiae. Giving up that extra 1.8 percent on a long-term investment can suck hundreds of thousands out of your wallet over the decades. It can spell the difference between a safe and secure retirement, and one fraught with uncertainty and worry.