There are always individual actively-managed mutual funds that bring outstanding returns, but it is rare for these funds to actually outperform passively-managed funds in the long run. According to the Wall Street Journal, 82% of all U.S. stock mutual funds have trailed their respective benchmarks over the last 15 years. Do you think you can pick the 1-in-5 winner? And then, do you think you can switch to the next hot fund before your current hot fund loses its heat?
For those interested in a more complicated answer (i.e., some mix of index and actively-managed funds), another Wall Street Journal article gives some options. However, Danial Solin warns that half of actively-managed funds disappear before then reach 10 years. As for the “winner” funds, he says “There’s no evidence of persistence of performance beyond what you would expect from random chance.”
After accounting to taxes and fees, actively-managed funds are even worse when compared to a passively-managed the index fund. The safe bet is to pick an index fund. Chapter 7 of Basic Personal Finance discusses the topic in more detail.