Over the past decade, how much difference has there really been between the best and worst performing active funds? You might expect a big gap, but the reality is more nuanced. Looking at large-blend active funds through May 2025, the top 25% of funds delivered an average annual return of 12.1%, while the bottom 25% averaged 10.5%. A difference of just 1.6 percentage points per year—sounds modest, right?
But here’s the catch: short-term differences are much bigger. Year by year, the gap between top and bottom funds can easily exceed 5 percentage points. For example, in the year ending May 2024, the best large-blend active funds outperformed the worst by 6.7%. This pattern isn’t unique to large-blend funds; it holds across fund types. So while long-term differences might look small, short-term swings can be huge—and that makes all the difference for investors.
Take Jack and Mary, two everyday investors from New York. Jack likes to switch funds based on recent performance, chasing last year’s winners. Mary, on the other hand, sticks with her investments for the long haul, ignoring short-term noise. Over time, Jack sometimes hits big gains but often ends up losing because short-term fund performance is unpredictable and volatile. Mary’s steady approach smooths out those ups and downs, resulting in a more stable, though less spectacular, outcome. Their story highlights why picking the “right” active fund in the short run is a gamble—and one that doesn’t always pay off.
Why do these performance swings happen? Two main reasons: first, mean reversion. Funds that do well for a short time often benefit from luck or favorable market styles that eventually fade. Those that underperform can bounce back. Over time, these ups and downs balance out, bringing returns closer together. Second, fund survival bias plays a role. Poor performers tend to be merged or shut down, removing their low returns from the picture and making the gap between survivors seem smaller.
For investors, this is a crucial lesson. Don’t be fooled by the small long-term difference between top and bottom funds. Most investors don’t hold a fund for ten years or more—they usually review performance every three years or so. Over these shorter periods, the gap between winners and losers can be much larger, and making frequent switches can amplify losses.
Moreover, many active funds don’t last a decade. Less than half survive ten years. When funds close, investors’ holding periods are cut short, often leading to worse returns than expected.
Consider Emily, a financial advisor from Chicago, and her client Tom. Tom frequently switched funds chasing high returns, only to have many of his picks shut down after a few years. This disrupted his portfolio and led to disappointing results. Emily now advises clients to avoid constant switching and consider low-cost index funds or stable performers instead.
All this begs the question: given these risks, shouldn’t more investors just give up on active funds and embrace indexing? Many experts think so. The low fees, transparency, and consistent market returns of index funds make them a smarter choice for most.
Of course, there are exceptions—private equity and venture capital funds often show huge performance gaps, and picking the right manager matters greatly there. But that’s a story for another day.
In everyday life, we all know people who love to gamble. Investing in active funds can sometimes feel like a gamble too—winning small amounts occasionally, but risking bigger losses. If you’re that gambler, remember to control your risk. If you prefer steady long-term investing, keep fund survival and mean reversion in mind.
Bottom line: don’t be fooled by short-term performance or the seemingly small long-term differences. Understand your time horizon, fund lifespans, and your own investing style to navigate the risky game of picking active funds wisely.