What is the shelf life of a mutual fund?

Question

If someone 30 years old puts away money in mutual funds planning to redeem at age 60, is this a good idea?

Most mutual funds are 3-4 years old. Would they last 30 years? What is the shelf life of a fund?

Answer 1

There are many index funds that are decades old. Some ETF versions of those funds might not be as old, but that is due to the fact that ETFs weren't popular decades ago.

Even somebody in a buy and hold mode should periodically check the status of their funds. You don't want to miss key news that would make you switch funds due to change of focus or mismanagement.

In addition you need to review your investing mix to adjust for recent performance, and to adjust for changes to your life. Re-balancing your investments periodically is a thing.

If the investment is inside a government recognized retirement account switching funds shouldn't have a tax impact. In the United States this would include IRAs and 401(k) and the like. Other countries have their own recognized retirement accounts.

Answer 2

Most mutual funds are fairly low risk, since they're inherently diversified. They aren't likely to drop dead. They are more likely to either be outperformed by other funds -- in which case your periodic reconsideration and rebalancing of your investments should result in your moving to a more appropriate investment -- or to be merged into other funds as investment houses buy each other.

I've been in roughly the same sets of funds for 20 years. The original IBM experiments in index funds (ILCIX etc.) eventually merged into Columbia's product line, and Columbia then merged with Theadneedle; each merger resulted in some overlap and similar funds were combined to simplify the investment bookkeeping. But that was mostly transparent to the investors; I still have the same accounts though their names and minor details have changed.

You may never feel you need anything but mutual funds; low-fee index funds do everything I need. But you can change which funds you are invested in. Doing so will probably be a taxable event, but that isn't a problem; you'll pay taxes on your profits eventually anyway, and you can manage how much you move when to optimize things a bit.

Note that if you're investing within a 401k or similar tax-deferred plan, there is really no cost to rebalancing that. There may be limits on how often you can do so, but since you should be thinking long-term in those accounts, being able to rebalance only once a month or so really isn't a hardship.

Answer 3

While "buy and hold" is generally a good strategy for long-term investors, "buy and ignore" is not. Mutual funds are a good investment if you don't want to spend a large amount of time researching companies, but you still have to do some work. You should periodically review the funds that you've invested in to make sure they're still good choices.

I've been investing almost exclusively in managed mutual funds for about 40 years, so I'll talk about how I've done it pretty successfully and with little hassle. When I started, I simply chose a handful of funds at the top of the rankings by Kiplinger's or Consumer Reports (I don't remember); the well-known Fidelity Magellan was one of them.

At the beginning I waited for these magazines' annual rankings to see how my funds were doing and whether they were still recommended, as well as looking for other funds that I could invest new money into. Mutual funds don't usually go sour suddenly, so reviewing them once a quarter or once a year should be fine. Of course, if there's a market crash it will affect most funds -- but you should usually consider a fund's long-term, relative performance against its peers. When investing for the long term, don't let these termporary setbacks scare you into selling -- the market has always bounced back.

Eventually my portfolio got large enough that I started working with a financial advisor, and I depend on him to review the quality of the funds and use financial models to advise on investing strategy. But don't worry about this kind of thing now. I got along pretty well during my first decade or so of investing by just going with the funds at the top of rankings. I just selected the top-rated fund in a few different categories (growth, value, bonds, etc.); when reviewing, just make sure it's still near the top. I probably only dropped 1 or 2 funds during that time (my biggest change was when I phased in Contrafund as a replacement for Magellan after Peter Lynch retired).

While there may be many young funds (I'm not sure where you got the info that most funds are only a few years old), there are also lots of funds with long, established track records. As a beginning investor, stick with these.

So when considering your 30-year projected time span, don't think about whether any individual fund will last the entire time. The only fund I've had for over 20 years is Contrafund. But I've held many of my other funds for at least a decade.

I haven't tried this approach myself, but there are funds that are deisgned for investors who really do want to just "set and forget". They're called "target funds". They generally purchase other mutual funds rather than individual stocks, often just index funds. Their strategy is that the mix of funds they invest in is designed with expectation that you'll retire around the target year. When this is decades away, the bulk of the portfolio is growth funds, which can be volatile. As the target year gets closer, they move more of the portfolio to stabler investments: value and bond funds. So you might consider a fund with a target date of 2050 or 2060 to meet your 30-year horizon.

Answer 4

In the UK many investment trusts have been going since the 19th century, the oldest one (Foreign & Colonial) was the first collective investment in the world and has been going since 1868.

Which is not to say that every trust established since then is still going independently, but they can get taken over or merge like any other business. There exists continuity even under different management.

While the goals are similar, ITs are structured slightly differently from traditional mutual funds in that the fund is a standalone company, rather than a tradeable product from another company. The IT structure was developed first, so it's the one with the most longevity.

Answer 5

What is the shelf life of a mutual fund?

It depends on the mutual fund and the investor.

Silly metaphor with a similar level of complexity: the shelf life of a gallon of milk depends on the hygeine of the farm, the time and temperature of the milk while in transit, the temperature control of your fridge, the time spent on your kitchen counter (1 hr on the counter = 1 day of fridge life), and the sensitivity of the nose of the person sniffing the jug.

mutual funds facts

• The average fund age is ~ 9 years.1 This jibes with a statistic I read a decade ago that 1 in 10 mutual funds die annually. This is a close enough number.
• There are a many types of mutual funds: active funds, passive funds, index funds, ETFs. There are closed-end funds, open-end funds, front-loaded funds, and no-load funds. Definitions of these and other investing terms can be found on investopedia.com.
• Year after year, the majority of actively managed funds underperform their benchmarks.
• Over the 5 years ended in 2022, "not a single mutual fund — managed to beat its benchmark"2
• Over 20 years, ~90% of actively managed funds underperformed their benchmarks.3
• In the last 30 years, $115B has flowed out of actively managed funds and into passive.4 As one might guess, the lifespan of actively managed funds has diminished.
• Read the fine print when companies brag about their performance. Example: "84% of Fidelity equity funds managed by the same portfolio manager for at least 5 years are beating their benchmark over the manager's tenure (41 of 49 funds)."5 When you're aware that the average managers tenture is less than 5 years (selection bias), that highly qualified statistic fails to impress.6
• A mutual fund can beat its benchmark while its investors do not. A mutual fund whose benchmark is VFINX and returns a 1% larger gain but has 2% in fees puts less money in the pockets of the investor. The fund managers incentives and yours may not be aligned.7 8

When one considers the scale of the shift from active to passive, and considers how investors are voting with their feet, observers could be forgiven for thinking that the shelf life of actively managed mutual funds is negative. As in, actively managed funds are vestigial, left over from the last century when investing was expensive ($20+ per trade) and accumulating a diversified portfolio of stocks and bonds required combing the finance section of the newspaper to choose stocks and then calling your broker on an ancient appliance called a telephone so that he could in turn make more telephone calls to execute your trades.

Today, if we want a portfolio with the longest shelf life (the one with the statistically best chance of providing the best risk-adjusted returns over long periods of time), then we want an "autopilot" strategy that consists of:

- 60% US Stocks (VTI)
- 20% International Equity (VXUS)
- 20% Bonds (BND)

Each year, we rebalance the portfolio 1-2 times to match our target allocations.9 As we age, we might adjust the stock ratio down with the "120 minus your age" rule. It's very close to set-it-and-forget-it. There's also a high probability that our index funds will outlive us.

The autopilot portfolio is so popular that brokerages make products that do exactly what I just described: Target Date Funds. If you expect to retire in 2035, then you buy a 2035 TDF like VTTHX. The catch is that unless you're Vanguard, most TDFs have substantially higher fees than buying the underlying index funds.