Consider broad-market index funds for the portion held for the long term
Active funds collectively hold something close to the market, but their extra fees directly reduce investors' returns. Simulations distinguishing skill from luck found few funds earning enough above-market return to cover their costs.
What it takes
No additional spending. You give up the possibility of picking a star active manager and must tolerate market declines without abandoning the plan.
What you may gain
Fama and French found that US active equity funds' aggregate portfolio resembled the market portfolio, while high active-management costs translated directly into lower net returns. Bootstrap simulations repeatedly resampled performance to assess what chance could produce; few funds generated enough excess return to cover costs. The study was published in 2010. S&P Dow Jones Indices reported that 65% of US active large-cap equity funds underperformed the S&P 500 in 2024; over 24 annual scorecards, the average was 64%. Over the 15 years ending in 2024, no category had a majority of active funds outperforming.
Context & considerations
Harvey and Liu argue that the Fama–French test has insufficient power: even meaningful genuine excess performance may be classified as indistinguishable from luck. “Almost no fund has skill” may therefore be too strong. The source has not located original research establishing whether Chinese active funds collectively underperform indexes. This is not investment advice.
Research & references
Fama EF, French KR (2010). Luck versus Skill in the Cross-Section of Mutual Fund Returns. The Journal of Finance 65(5):1915-1947. https://doi.org/10.1111/j.1540-6261.2010.01598.x ; S&P Dow Jones Indices (2025). SPIVA U.S. Scorecard Year-End 2024. https://www.spglobal.com/spdji/en/spiva/article/spiva-us/ (the official site blocked automated retrieval; figures were checked against the May 12, 2025 archive: https://web.archive.org/web/20250512071051/https://www.spglobal.com/spdji/en/spiva/article/spiva-us/). Verification pending: comparable original research for the Chinese market was not found. Harvey CR, Liu Y (2022). Luck versus Skill in the Cross Section of Mutual Fund Returns: Reexamining the Evidence. The Journal of Finance, 77(3). https://doi.org/10.1111/jofi.13123 (the challenge to the original interpretation).