measure long-term fund returns. One is to compute the returns of all
funds that have survived over the period examined. But the long-term
returns on these funds suffer from survivorship biasthat overestimates
the returns available to investors. This survivorship bias exists because
poorly performing funds are often terminated, leaving only the more
successful ones with long-term track records to be included in the data.
The second, and more accurate, method is to compute, year by year, the
average performance of all equity mutual funds in existence.
Both of these computations are shown in Table 20-1. From January
1971 through December 2006, the average equity mutual fund returned
10.49 percent annually, 1.06 percentage points behind the Wilshire 5000
and 1.04 percentage points behind the S&P 500 Index. Indeed, the sur-
vivor funds returned 0.80 percentage points more per year but still
lagged the averages. And all these fund returns exclude sales and re-
demption fees that would reduce their net returns to investors even
more.^3
The underperformance of mutual funds does not happen every
year. Actively managed equity funds did on average outperform the
Wilshire 5000 and the S&P 500 indexes during the period from 1975
through 1983 when small stocks returned a spectacular 35.32 percent per
year. Equity mutual funds generally do well when small stocks outper-
form large stocks, as many money managers seek to boost performance
by buying smaller-sized firms.CHAPTER 20 Fund Performance, Indexing, and Beating the Market 343
TABLE 20–1
Equity Mutual Funds and Benchmark Returns: Annual Compound Returns (Excluding Sales and
Redemption Fees), January 1971 through December 2006 (Standard Deviations in Parentheses)(^3) Fund data provided by the Vanguard Group. See John C. Bogle, Bogle on Mutual Funds, Burr Ridge,
Ill.: Irwin Professional Publishing, 1994, for a fuller description of these data.