Only idiots invest in mutual funds in taxable accounts
So says a smart guy at MIT who ran some simulations. A mutual fund manager would have to outperform the market by 4.3 percentage points per year before expenses to equal the performance of an index fund for a high-tax investor investing in a taxable account. Such performance is virtually impossible over the long run.
"Mr. Kritzman calculates that just to break even with the index fund, net of all expenses, the actively managed fund would have to outperform it by an average of 4.3 percentage points a year on a pre-expense basis. For the hedge fund, that margin would have to be 10 points a year.
The chances of finding such funds are next to zero, said Russell Wermers, a finance professor at the University of Maryland. Consider the 452 domestic equity mutual funds in the Morningstar database that existed for the 20 years through January of this year. Morningstar reports that just 13 of those funds beat the Standard & Poor’s 500-stock index by at least four percentage points a year, on average, over that period. That’s less than 3 out of every 100 funds."