Why Most Active Funds Fail Over 20 Years

For decades, investors have been sold on the idea that active fund managers—those who pick individual stocks and time the market—can outperform the broader market. But the data tells a different story, especially when you look at the long term. Over a 20-year period, the vast majority of active funds fail to beat their benchmark indexes, and many underperform by a wide margin. Why is that, and what does it mean for your investment strategy?

First, let’s define the terms. An active fund is managed by a professional who selects securities (stocks, bonds, etc.) with the goal of outperforming a specific benchmark, like the S&P 500. A passive fund, by contrast, tracks an index, buying all or a representative sample of the securities in that index, with no active stock picking. The key difference is cost and consistency.

One of the biggest reasons active funds struggle long-term is fees. Active funds typically have higher expense ratios—often 1% or more—compared to passive funds, which can have expense ratios as low as 0.03%. Over 20 years, these fees compound just like your investments do, eating into your returns. For example, if you invest $10,000 in a fund with a 1% expense ratio and a 7% annual return, you’ll have about $37,000 after 20 years. If you invest the same amount in a passive fund with a 0.05% expense ratio and the same 7% return, you’ll have over $40,000. That’s a $3,000 difference from fees alone.

Another factor is market efficiency. The stock market is largely efficient, meaning that most information about a company’s value is already priced into its stock price. This makes it extremely difficult for active managers to consistently find “undervalued” stocks that will outperform. Even the best managers have off years, and over time, their outperformance (if any) is often erased by down years and fees.

Research backs this up. A 2025 study by S&P Dow Jones Indices found that 92% of active large-cap funds underperformed the S&P 500 over a 20-year period. For mid-cap and small-cap funds, the numbers are even worse—95% and 96% underperformed, respectively. These aren’t outliers; this is a consistent trend year after year.

Does this mean all active funds are bad? Not necessarily. There are a small number of active managers who have consistently outperformed over the long term, but they are rare. For the average investor, the odds of picking one of these managers in advance are extremely low. Even if you do, past performance is not a guarantee of future results.

So, what’s the alternative? Passive investing through low-cost index funds or ETFs. By tracking the market, you’re guaranteed to match the market’s return (minus tiny fees), which has historically been around 7% annually (adjusted for inflation) over the long term. This approach is simple, low-cost, and has a much higher chance of success for most investors.

The bottom line: Active investing is a gamble. Over 20 years, the odds are stacked against you. Passive investing, on the other hand, is a proven strategy for building long-term wealth without the stress of trying to beat the market. Stick to low-cost index funds, stay invested, and let time and compound interest do the work.