The difference between index funds and mutual funds
To illustrate his point, Hallam pits the glossy mutual fund against the humble low-fee index fund, an unsexy slice of the overall market that offers broad exposure and an average annual return that hovers around 10%. While there are plenty of mutual funds that beat both that average and the S&P 500 year after year, Hallam encourages his reader to zoom in further to discover just how rare and misleading such a feat truly is.
If financial advisors worked on a volunteer basis and mutual funds were free to run, he notes, they d triumph over index funds about half the time. (Because index funds, being representative of the market at large, can never actually beat that market, which individual stocks and funds can.) But until that fantasy becomes a reality, Hallam estimates that an actively-managed mutual fund will need to beat the S&P 500 by an average of 4.6%