Mutual Funds and expense ratios

I am considering getting into a (semi-)managed fund that claim it could outperform the S&P 500. What would a reasonable expense ratio for such a product?


It depends on how much they claim to beat the S&P 500 by. First of all - be sure they are comparing to the S&P 500 TOTAL RETURN (which includes dividends), not just the price appreciation of the index. You should look at least 10 years back and ensure that the net profit (after expense ratio) for each year is higher than the S&P 500 total return (again, including dividends) for at least 7 out of the last 10 years, as well as beating the return for the total 10 year timeframe. And actually, at this point after the Financial Crisis, I would suggest that you should be looking 15 - 20 years back, because of the market dislocations that occurred during that crisis, which started about 15 years ago. If they don’t have a track record that’s that long, I don’t know that I would pay any extra expense ratio for the product.


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I have never met anybody who wants to loose money or have lower returns. I also believe generally speaking higher returns always come with great risk. So our investment decisions are what balance or risk and return should we have.

Now for the sake a clarity – I am going to give my definitions for return and risk. These are the changes in an investment (or portfolio’s) value assuming we make no withdraws or additions.

I believe you are not asking the best question. Expenses include utility bills, rent and employee/management wages. Most of us would not be too worried if their managers spent say 5% more on research vs the average manager. I would certainly object if my manager spent 5% above the average on executive salaries/bonuses.

Let me suggest you compare returns of the fund you are considering vs the S&P500 for a periods or 10 and if possible up to 20 years. Morningstar is a great place for doing that. If you spend a couple of hundred dollars for the Premium data set, you can even pick specific calendar dates you really are comparing Apples to Apples.