Most investors attempt to beat the market at some point in their investing career. Some investors delve into picking individual stocks and others try market timing, but the most common way new investors try to beat the market is buying actively-managed mutual funds. Many people think by looking at a fund manager’s past record or carefully examining mutual fund statistics and ratings from companies such as Morningstar or Kiplinger, they can identify ahead of time which fund managers are likely to beat the market’s return going forward and allocate their portfolio accordingly. This is a fool’s errand.

Study after study from such diverse sources as Morningstar, Ibbotson and Associates, and academics at finance schools all over the world confirm most mutual funds do not and cannot outperform the market. Over any given period, around 70% of all actively-managed mutual funds fail to beat the market. What’s more, the funds that do manage it tend to change year after year. That is, just because a fund happened to beat the market over the past year or two is not an indication it will continue to do so. Quite the opposite is true, in fact: top performing funds in any given year tend to bring up the rear of the performance lists the following year. The experts are virtually unanimous on this matter: it is impossible to know which actively-managed mutual fund will outperform going forward.

The solution to this problem, of course, is to invest in a balanced portfolio of broadly-diversified, low-cost index funds. With index funds, you are guaranteed to match the performance of the overall market minus its razor-thin expense ratio. Doing the math based on what we already know, it is likely index funds will beat the performance of 70% of all actively-managed mutual funds over time. That said, trying to beat the market is exciting and many investors will attempt it no matter what the experts say for the same reason people gamble in Vegas even though they know the odds are against them: it’s a lot of fun. Allocating a small percentage of your portfolio to trying to beat the market with actively-managed mutual funds, maybe 10% or 20% at most, can give you a fighting chance at above-average returns without much additional risk.