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Summary

The portfolio managers of mutual funds seem to be successful in picking good stocks and knowing when to sell them. Unfortunately, mutual funds tend to impose high fees on their investors. Any outperformance of the market obtained from skillful management is eliminated by the costs of the mutual fund. As a consequence, the mutual fund investor fails to outperform the S&P 500 Index. One of the most important factors of underperformance is the costs of the fund. Yet, most investors are not diligent in using costs as an important factor for making decisions. Instead, mutual fund investors prefer to pick funds that were past winners. Getting a high Morningstar rating or advertising a particular mutual fund increases the chasing of the winners.

Unfortunately, the future performance of these winners is not as good as we would hope. Some definitions of winners, like the Forbes “honor roll” or advertised funds, did not produce future winners. Other definitions, like last year's winners or the Morningstar rating, produced funds with good performance the following year. However, good performance is short-lived and is not enough to overcome any loads charged by the funds. On the other hand, it is much easier to avoid the poor funds. Funds with poor prior performance or low Morningstar ratings continue to produce poor returns. This is mostly due to the higher costs imposed by these funds. Mutual fund expenses are very important to the return realized by the mutual fund investor. Chapter 9 illustrates that many of these costs are hidden to the investor.


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