By definition, a mutual fund's return is the total return of the stock minus any fees associated with investing the money. Because index funds are managed almost on autopilot, fees for these vehicles are extraordinarily low. To beat the market clearly and decisively, the pre-expense performance has to be extraordinary. In fact, if you imagine a bell curve measuring returns that has been shifted to the left of the pre-expense mean by a percent or two to account for fees, you can easily see why, by definition, the majority of mutual funds have to underperform the benchmark. Beyond buying an index fund, the reality of this for your portfolio is quite simple.
Index funds generate market performance by keeping expenses low.
In their rush to put money into the market, individual investors often run up miscellaneous expenses for trades, investment information, and software that costs them quite a bit more of their total capital than one to two percent. For each dollar you pay to invest, you have to make back that dollar plus some more in order to make any money at all. In order to beat index performance where expenses have been minimized through a pattern of long-term holding, you have to be exceptional. Although there are a few individuals that are exceptional, the majority of people are best served by concentrating on how much they spend to invest or they risk underperforming on a pre-tax basis with the same regularity as professional money managers. The Motley Fool.