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How To Beat The Stock Market Averages When Investing In Mutual Funds

Updated on January 19, 2017

How To Beat The Stock Market As A Mutual Fund Investor

Understanding this important but not so well known fact regarding how to beat the stock market averages when investing in mutual funds can increase your long-term stock market gains. The mutual fund community would rather keep this fact a secret, and therefore few investors know it and understand the best strategy when investing in mutual funds.

Individual investors incorrectly assume that if they invest money in mutual funds that are managed by professional money managers, their mutual fund investments are being well managed, and their investments will consistently beat the stock market averages. Unfortunately, despite all the fees they collect to manage mutual funds, the majority of professional money managers that oversee the day to day operations of mutual funds and make buying and selling decisions actually have performance results that are worse than the stock market indexes that their mutual funds are compared against. This means investors looking to beat the stock market averages need to chose their mutual funds carefully, based on research regarding various funds' performance.

Mutual Fund Money Manager’s Performance | Not As Good As Many Believe

While mutual fund companies are happy to accept investor’s money and hide behind the facade that they know how to properly manage money, the fact is that many studies of the mutual fund industry have all come to the same conclusion: in any given time period, somewhere between two-thirds and three-quarters of all mutual funds fail to beat their bench mark tracking indexes. This means that investors are paying professional money managers hefty annual fees to manage their mutual fund investments, and come out ahead of the overall performance of the stock market when holding only one-quarter to one-third of professionally management mutual funds. This performance is dismal. Most investors would earn better investment returns by buying passively managed (meaning non-managed) index mutual funds that simply track major stock market indexes that hold all of the stocks in their tracking indexes. Not only would their returns be better, on average, but they would pay far less in annual management fees while holding passively managed index mutual funds, thus increasing their investment returns.

How To Beat The Stock Market Averages When Investing In Mutual Funds

Luckily for individual investors, it is not difficult to figure out how to beat the stock market averages when investing in mutual funds. The extensive information available on the Internet regarding mutual fund performance has leveled the playing field for individual investors, allowing them to thoroughly research mutual fund performance versus their bench mark tracking indexes and chose mutual funds that have a history of beating their bench mark tracking indexes. Easy to use websites, such as MorningStar.com and Yahoo Finance, provide mutual fund performance and annual management fee information that individual investors can use to gauge how well the mutual funds they are holding are performing versus their bench mark tracking indexes and whether or not they are paying above average fund annual management fees. In order to accurately assess a mutual fund’s performance, a fund’s annual management fee must be subtracted from the amount a mutual gained (or lost) in a given time period.

While it is helpful to assess how well the mutual funds one is holding are doing versus their bench mark tracking indexes, this only provides a snapshot of how well one is positioned in mutual funds. To find mutual funds that consistently beat their bench mark tracking indexes to replace poorly performing mutual funds, search in major search engines for “the best performing mutual funds” or “mutual funds that beat stock market averages”. Such a search will reveal numerous articles written about mutual funds that have a record of beating their bench mark tracking indexes. While past performance is no guarantee of future results in the world of mutual fund investing, it is better to go with mutual funds that have good performance records than to stick with funds that consistently fail to beat their bench mark tracking indexes. If search engine queries do not provide adequate results, try searching financial websites, such as MorningStar.com or SeekingAlpha.com for articles about mutual funds that consistently outperform their bench mark tracking indexes.

Putting Your Best Foot Forward When Investing In Mutual Funds

While investing in mutual funds that consistently perform better than their bench mark tracking indexes is no guarantee than an investor will make money in a given year, at least an investor can have the peace of mind that they are putting their best foot forward when investing in mutual funds and not buying into the notion that just because mutual fund managers are a professional money managers, they will automatically beat the average stock market returns. It is better to be with the smart money and invest in mutual funds that have track record of succeeding and providing above average returns than to remain part of the investing heard that throw their investment capital blindly at highly paid professional money managers that manage underperforming mutual funds.

Disclaimer: This article was not written by a financial professional or a registered financial advisor. This article is for informational purposes only, and is not intended to be solicitation or recommendation to purchase any financial products or securities mentioned herein. Please consult a registered financial advisor to ensure you understand the risks and rewards associated with buying and selling financial products and securities.

If you have additional ideas regarding how to beat the stock market averages when investing in mutual funds, feel free to share them in the comments section below.

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    • Rock_nj profile imageAUTHOR

      John Coviello 

      23 months ago from New Jersey

      2016 is a good year to assess how your mutual funds did, since it was an up year in the stock market. If they aren't beating the stock market averages, it may be time to look at others.

    • Daddy Paul profile image

      Daddy Paul 

      3 years ago from Michigan

      I do a lot of investigating on this subject. I find fund picks from Fidelity to be the best source other than my blogs... LOL!

    • drpennypincher profile image

      Dr Penny Pincher 

      4 years ago from Iowa, USA

      I have some index funds that have performed quite well. Most index funds have very low fees and do not require active trading. Good points re: actively managed funds not necessarily beating average performance. Voted up!

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