Why are low cost index mutual funds superior to high cost managed funds? You can scan the popular press and see articles telling you why but let's look at my experience:
- In 1984, I started buying a top-rated Canadian mutual fund called "Dynamic Fund of Canada", now called "Dynamic Value Fund of Canada". It is no load but has a 2% management fee.
- In 1998, after I moved to the USA, I started buying a top rated low cost index mutual fund "Vanguard Total Stock Market Index Fund". It is no load and has a 0.17% management fee.
I don't have the ability to easily analyze my early returns before the introduction of the PC and Quicken, but I can compare performance between 1998 and 2014.
- The Dynamic Fund returned 8.29%. A $10,000 investment in 1998 would be worth $35,800.
- The Vanguard Fund returned 8.90%. A $10,000 investment in 1998 would be worth $39,100. This is 9% more than the managed high cost fund.
Clearly, the higher cost fund has not done as well.