Why "Buying the Haystack" Beats Looking for a Needle
We all like to think we can spot a winner. Whether it’s a startup, a sports team, or a stock, we’re drawn to the idea of picking the one that will outperform the rest. This mindset is especially common in , where many believe they can find the mutual fund that will deliver incredible returns. For those treating to build wealth, the allure of finding that "needle in a haystack" is powerful.
But what if the game is rigged against us? The hard truth is that trying to select winning funds in advance is far more difficult than it seems. The funds we hear about are almost always the ones with a glowing track record. We don't hear about the ones that shined brightly for a season before fading away. And when they fade, they often disappear completely—liquidated or merged into another fund, erased from history.
While it's easy to identify past winners, there's very little evidence that this success carries into the future.
The Harsh Reality of Long-Term Investing
Let's look at the data. A study of 355 equity funds that existed back in 1970 reveals a staggering reality 46 years later.
First, the most shocking discovery: 281 of those funds—nearly 80%—were gone. They had gone out of business. If your fund can’t even survive for the long haul, how can you? It was almost always the laggards that vanished. Sometimes their managers left, their management companies were acquired, or investors simply pulled their money out, making the fund unprofitable to run.
Even funds with solid histories aren't safe. The second-oldest fund in the industry, the State Street Investment Trust, survived the market's ups and downs for 80 years before its new owners shut it down in 2005. For those who had followed the industry, its loss felt like a death in the family.
The odds of picking a long-term winner from that initial group were dismal. Of the 355 funds:
- disappeared entirely.
- survived but significantly underperformed the S&P 500.
- essentially matched the market's return.
That means 345 of the original 355 funds either failed, underperformed, or just broke even with the market. Only 10 funds—just one out of every 35—managed to beat the market by more than one percentage point per year. And for eight of those, the margin of victory was so slim it could easily be attributed to luck.
The Winner's Curse: A Tale of Two Funds
That leaves us with just two standout long-term winners: Fidelity Magellan and Fidelity Contrafund. Both managed to beat the S&P 500 by more than 2 percentage points annually for nearly half a century—a truly remarkable achievement. But their stories offer a critical lesson for anyone .
Take the Fidelity Magellan Fund, made famous by star manager Peter Lynch. Its most incredible gains came in its early days when it was small. As it grew from just $7 million in assets to over $100 billion, its performance edge evaporated. From 1994 to 1999, it actually lost to the S&P 500 by 2.5% per year. The classic story of counterproductive investor behavior played out: money poured in when it was hot and rushed out when it turned cold.
The Fidelity Contrafund story is similar. Under manager Will Danoff, the fund achieved amazing success. But as its assets ballooned past the $100 billion mark, its outperformance vanished. Over the last five years of the study, it underperformed the S&P 500.
As Warren Buffett famously said, “a fat wallet is the enemy of superior returns.” When funds get too big, it becomes incredibly difficult to maintain an edge. This is a core challenge of : success often contains the seeds of its own mediocrity.
Don't Look for the Needle—Just Buy the Haystack
If the odds of picking a long-term winner are less than 1%, what should an investor do? The answer is surprisingly simple: stop looking for the needle and just buy the entire haystack.
The "haystack" is the entire stock market, which is easily accessible through a low-cost index fund. An S&P 500 index fund would have matched or beaten the returns of 345 of the 355 funds in that 46-year study. This isn't magic; it's just math. By owning the market, you guarantee you get the market's return, minus a tiny fee. This is the most reliable way to generate through the market over the long term.
When you're for a lifetime, you have two choices. You can spend your time and energy picking a handful of actively managed funds, knowing their managers will likely change and the funds themselves might not even exist in a decade. Or you can buy a single, broad-market index fund and hold it forever.
Even the experts agree. Warren Buffett’s will instructs that his wife’s trust be invested 90% in a very low-cost S&P 500 index fund. He considered looking for the needle but ultimately decided to buy the haystack.
Every mutual fund prospectus includes a warning, often in tiny print: “Past performance is no guarantee of future results.” It's time we all started believing it. For those looking at to build real, long-term wealth, the most effective strategy isn't the most exciting—it's the most sensible.
