Roulette has a Higher Chance of Success than Active U.S. Equity Funds

As the title suggests, the probability that an Active U.S. Equity Fund outperforms the index, over a 10 year period, is lower than playing roulette. We even compared it to American style roulette, which has an extra 00 compared to typical roulette.

You should still buy U.S. Equities, just use an index fund such as VOO from Vanguard.

  1. We reviewed 1,561 Active U.S. Equity Funds with 10 or more years of history
  2. Morningstar quotes 83% Active Large Cap Managers underperform the index
  3. We calculated that 67% Active U.S. Large Cap Manager underperform the index over a 10 year period

The worst part is, the more Active U.S. Equity Funds you have in your portfolio, the lower the probability of outperformance. If you have one Active U.S. Equity Fund, then the probability of outperforming the index over 10 years is only 32% by my calculations. That is that lower than the probability of winning at roulette. Here is the really bad news, if you own more than one Active U.S. Equity Fund in your portfolio then your probability of beating the index falls quickly from an already low number.



You should still own U.S. equities. This analysis only shows the benefits of using an index fund instead of an actively managed fund in a highly efficient market such as U.S. equities.

If you own more than three Active U.S. Equity Funds you should consider investing in an index strategy instead. VOO from Vanguard is a low cost option. Allocate your fees on being active in less efficient markets such as global bonds, emerging market equities or commodities.


Active U.S. Equity Fund: A mutual fund that is attempting to beat the index in the U.S. Stock market. These funds generally have higher fees than index funds.

American Style Roulette: Has a lower probability of winning than traditional roulette.

Data and Assumptions:

  • All available share classes are included in the analysis
  • We excluded 12b-1 fees and loads (this would make Active U.S. Equity Funds look even less compelling)
  • We do not include survivorship bias (this would make Active U.S. Equity Funds look even less compelling)
  • We excluded funds that have more than 20% in foreign equities or asset classes other than U.S. Equities.
  • The fund returns we used in the analysis are as of 7/31/2015.
  • A fund had to have at least 10 years of history to be included.
Please refer to disclosures. Views are only opinions and not guaranteed to be accurate.

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