The differential between actively managed funds and passively managed index funds is very easily explicable. The difference does not come from the actively managed mutual funds being run by buffoons. Not at all. The stocks that mutual fund managers pick end up being more or less average performing stocks. One must first look at an index of the whole stock market, the Wilshire 5000 Index .
Many funds also buy and sell their holdings at a rapid pace.
This practice has been a very expensive penalty during the bull market of the 1990s. This holding of cash reserves essentially explains the rest of the differential between mutual funds and the market. We sure hope so. We'll return and explain all of these concepts in further detail in Part 7 and 8, but if you are invested in any mutual fund and are not currently aware of how expense ratios, turnover, market sector, and cash reserves apply to your fund, you are investing blind. Cut your taxes with help from our Tax Center.