Can Individuals Beat Mutual Funds?

Individual investors can beat mutual funds over particular periods. They can also beat a market index, and some will do both by a wide margin. The harder question is whether an investor can do it consistently, after trading costs and taxes, without taking risks that make the comparison meaningless.

That distinction matters because “beating mutual funds” is not one target. A conservative balanced fund, a small-cap stock fund and a large-cap growth fund are designed to do different jobs, so comparing all of them with the same return number tells us very little. An investor who wants to judge a self-managed portfolio fairly needs an appropriate benchmark and a record that captures costs, cash flows and risk, not just the best trades.

Individual investors do have some structural advantages over large funds. A small account is easier to move, the investor does not face shareholder redemptions, and there is no requirement to keep money in an asset class simply because a prospectus says that is the fund’s mandate. Those advantages are real, but they do not make outperformance easy, and they have to be weighed against the research, diversification, execution systems and investment discipline that professional organizations may provide.

What does beating a mutual fund actually mean?

The first step is deciding what is being beaten. If an individual owns mostly large U.S. companies, the S&P 500 stock index may be a reasonable reference point. It would be a poor benchmark for a portfolio dominated by small companies, international stocks, bonds or a mix of asset classes. A comparison with a specific mutual fund is useful only when the fund pursues a sufficiently similar mandate.

Return also needs to be measured on the same basis. Mutual fund returns already reflect the fund’s ongoing operating expenses, while an investor managing individual securities should deduct commissions where they apply, bid-ask spreads, other trading costs and any advisory or research expenses paid separately. Taxable investors should also pay attention to realized gains and losses because two strategies with the same pretax return can leave different amounts available to compound.

Risk is the other half of the comparison. A concentrated portfolio of five stocks might beat a diversified equity fund in a strong year, but that does not prove that the investor found a superior method if the portfolio took far more company-specific risk. A useful comparison looks at drawdowns, volatility, concentration and the possibility of permanent loss as well as the final return.

Time horizon changes the meaning of the result too. One year of outperformance can reflect skill, luck or a temporary style tailwind, and even several good years may coincide with a market environment that favors one type of security. Evidence becomes more persuasive when a strategy performs as expected across different conditions and when the investor can explain, before the fact, why the process should have an edge.

Individual investors have some structural advantages

The strongest point in the original version of this article is that size can matter. A person trading a few thousand dollars can usually enter or leave a liquid stock without materially affecting its price, while a very large fund may have to spread a transaction over time. That flexibility can matter most in smaller or less liquid securities, where moving a large block is harder and trading costs can rise as order size increases.

Small size also creates freedom over what not to own. A fund whose mandate requires it to invest mainly in U.S. small-cap stocks cannot simply turn itself into a money-market portfolio because the manager dislikes current valuations. An individual can decide that a particular opportunity set is unattractive and hold more cash or allocate elsewhere, although doing so introduces a new decision about when to return to the market.

The freedom is not unlimited on the fund side, either. The old article stated that mutual funds are committed by regulation to long positions and must stay almost fully invested, but that is too broad. Most conventional stock mutual funds are long-biased because of their investment objectives, yet current SEC rules permit registered funds, subject to conditions, to use derivatives and certain other transactions. Some alternative funds therefore have mandates that allow hedging or short exposure rather than operating as simple long-only portfolios.

Individuals have access to a wider toolset than traditional mutual funds if they choose to use it. Someone can invest in stocks, hold cash, use bonds, or buy ETFs that provide exposures unavailable in a conventional fund. More choices do not automatically improve results, however, because every additional tool adds decisions about position size, timing and risk management.

Professional funds have advantages of their own. Large organizations can employ analysts, portfolio managers, traders, legal and compliance staff, subscribe to expensive data, and speak with company management under rules that govern public and nonpublic information. Institutions may also obtain sophisticated execution technology and diversified exposure that would be cumbersome for a small account to reproduce security by security.

What the evidence says about retail investor performance

The evidence does not support the idea that a modest amount of effort makes market-beating results easy. A 2024 paper by Brad Barber, Shengle Lin and Terrance Odean examined retail trading and found that retail order imbalance could predict returns in some tests, yet retail trades on average still lost money. The authors traced an important part of that paradox to the tendency of retail purchases to concentrate in attention-grabbing stocks that subsequently underperformed. ^[1]

That finding is especially relevant to investors who select individual companies from whatever is prominent in financial media or social discussion. The problem with chasing hot stocks is not that a popular stock cannot rise further. It is that attention is not the same thing as expected return, and a portfolio built from the most noticeable names can become expensive, concentrated or dependent on a narrative that is already reflected in the price.

Frequent trading creates another hurdle because being right about the broad idea is not enough. The investor also has to choose the security, decide when to enter, decide when to exit, size the position, and repeat the process without allowing a few large mistakes to overwhelm smaller gains. Even in an era when many brokers advertise zero commissions, spreads, price impact in less liquid securities, taxes and poor execution decisions still affect realized results.

Behavior can be a bigger cost than the brokerage statement shows. Investors may hold losers because selling would make the loss feel final, sell winners too quickly, increase risk after a strong run, or abandon a strategy after a disappointing period. A mutual fund manager is not immune to behavioral errors, but a formal mandate and an institutional process can impose constraints that an individual has to create personally.

Diversification is another practical issue. A fund can spread assets across dozens or hundreds of securities without requiring the shareholder to research and monitor each one. A self-directed investor does not have to own hundreds of positions, but the smaller the number of holdings, the more important it becomes to understand how much of the portfolio depends on a single company, industry or investment thesis.

Professional mutual funds are not unbeatable either

The difficulty faced by individual investors should not be confused with proof that professional active managers reliably win. S&P Dow Jones Indices reported that 79% of active U.S. large-cap equity funds underperformed the S&P 500 in 2025. The results varied by category, with 55% of mid-cap funds and 41% of small-cap funds underperforming their respective benchmarks, which is a useful reminder that the active-versus-index record is not identical in every part of the market. ^[2]

This creates an important distinction for the title question. An individual can certainly beat many mutual funds because many funds themselves fail to beat appropriate benchmarks over a given period. Beating a below-average fund is not the same achievement as beating a low-cost index fund that provides similar exposure, and it does not establish that the investor’s method has generated positive risk-adjusted value.

Fund expenses also raise the bar for active managers. Investor.gov notes that fees and expenses reduce fund returns and that a higher-cost fund must perform better than a lower-cost fund to produce the same result for the investor. ^[3] That cost drag is one reason an individual with a low-cost brokerage account may have a structural advantage over an expensive active fund, although the comparison changes if the individual trades heavily, pays for advice or data, or incurs substantial taxes.

Large size can sometimes work against a fund as well. A manager overseeing billions of dollars cannot always build a meaningful position in a small company without owning a large share of its available stock, and entering or leaving such a position may take time. An individual account can exploit opportunities too small to matter to a giant fund, but that same part of the market can have wider spreads, less information and more company-specific risk.

The fairest conclusion is therefore not that professionals are too constrained to compete with individuals, or that individuals lack the resources to compete with professionals. Each side has different strengths. The relevant question is whether a particular investor has a repeatable edge that survives the costs and mistakes involved in putting it into practice.

Market timing is not an easy shortcut

The old article argued that individuals could beat funds by remaining invested during bull markets and getting out when a bear market begins. The attraction is obvious because avoiding a large decline would improve long-term wealth considerably, and investors may look for defensive assets during bear markets. The difficulty is that bull and bear markets are obvious in retrospect but not necessarily at the point when an investor has to trade.

A timing rule faces two decisions instead of one. Selling requires a signal that is strong enough to justify leaving the market, and returning requires another signal before too much of the rebound has already occurred. Fast market reversals can produce whipsaws in which the investor exits after a decline and buys back after prices have recovered, turning temporary volatility into permanent underperformance.

Momentum is a genuine market phenomenon studied by academics and practitioners, but it should not be reduced to the claim that momentum is what makes investing profitable. A momentum strategy needs precise rules, a defined universe, a rebalancing method and risk controls, and its historical record depends on the period and implementation being tested. A vague instruction to buy when the market is rising and sell when it is falling is not enough to establish an investable edge.

Short selling is also more complicated than simply taking the opposite side of a long trade. A long stock position can fall to zero, while the potential loss on a short position grows as the stock price rises, and borrowing availability can change. An investor does not need to short securities in order to manage risk, and the fact that a self-directed account permits a strategy does not mean that the strategy improves the odds of beating a fund.

A disciplined timing approach can still be evaluated like any other investment process. The investor should specify the rules before looking at the outcome, include trading costs and taxes, examine periods when the method failed, and compare the complete record with a realistic buy-and-hold alternative. A strategy that only works after the signals have been adjusted to fit historical data is not strong evidence of a durable advantage.

Where an individual may have a genuine edge

An individual investor’s best opportunities are often created by constraints that do not apply to a small account. A large fund needs ideas that can absorb a meaningful amount of capital, while an individual can invest in a company that would be irrelevant to the performance of a multibillion-dollar portfolio. The individual can also wait without pressure to deploy new inflows or meet redemption requests from other shareholders.

A personal time horizon can be an advantage as well. A fund manager may be judged every quarter or year and may face withdrawals after a period of poor relative performance, even when the underlying thesis has not changed. An individual investing money that will not be needed for many years can tolerate a longer period of relative underperformance, provided the position remains appropriate for the investor’s finances and risk tolerance.

Tax control can also favor direct ownership in a taxable account. An individual chooses when to realize gains and can sometimes use losses in one holding to offset taxable gains elsewhere, subject to applicable tax rules. A mutual fund shareholder does not control all of the portfolio’s trading decisions and may receive taxable distributions generated by activity inside the fund.

Specialized knowledge can help, but it needs to be handled carefully. Someone who understands an industry deeply may be better able to evaluate business models, competitive conditions or technical developments than a generalist investor. The edge must come from lawful analysis of public information, not material nonpublic information, and expertise in an industry does not automatically translate into skill at valuing its stocks.

Smaller portfolios also make it possible to concentrate more heavily in a best idea, which increases the potential impact of being right. The same arithmetic magnifies the damage from being wrong, so concentration should not be treated as an advantage by itself. It is a capacity advantage only when the investor can justify why the additional company-specific risk is worth taking.

How to test whether managing money yourself is working

A self-directed investor needs a benchmark before the trades begin. Choose one that resembles the portfolio’s opportunity set and risk, then keep it stable unless the investment mandate itself changes. Switching from the S&P 500 to a small-cap index after a disappointing year, for example, can turn performance measurement into an exercise in finding whichever comparison makes the portfolio look best.

The return calculation should separate investment performance from deposits and withdrawals. Adding $20,000 to an account can make the ending balance look much better without saying anything about investment skill, while withdrawing money can make a successful strategy look smaller. Brokerage reports often provide time-weighted or money-weighted performance measures, and the investor should understand which one is being compared with the chosen benchmark.

Keep the record after all costs that would disappear if the self-managed strategy were abandoned. That includes paid research services, advisory charges, trading expenses and other recurring costs attributable to the approach. Time has an opportunity cost too, even though it does not appear on the account statement, and an investor spending many hours each week on a strategy that barely matches a simple fund should decide whether the work itself is worth doing.

Performance also needs to be judged over more than one market regime. A strategy built around aggressive growth stocks may look exceptional during a strong growth cycle and weak when leadership changes, while a defensive approach may lag badly in a sustained bull market. The purpose of a longer record is not to demand that a strategy win every year, but to find out whether its behavior is consistent with the explanation for why it is supposed to work.

For many people, the most useful benchmark is not the average active mutual fund but a low-cost diversified index alternative. If a self-managed portfolio does not beat that alternative after costs and taxes, and does not provide another valued benefit such as lower risk or better tax control, the extra complexity has not earned its place. A broader investing framework puts that decision in the context of asset allocation, risk and the role each holding is meant to serve.

A hybrid approach is also legitimate. An investor can keep most long-term assets in diversified funds and use a smaller portion for individual securities or an active strategy. That structure limits the amount of wealth exposed to stock-selection mistakes while still giving the investor room to test whether a genuine edge exists over time.

So, can individuals beat mutual funds?

Yes, but the answer is less dramatic than the original article suggested. Individual investors can outperform particular mutual funds and market benchmarks, and a small portfolio has flexibility that a giant fund does not. The evidence does not support the claim that substantial outperformance becomes easy with a modest amount of skill or by simply moving in and out of the market when the trend appears to change.

The better standard is to ask whether the investor can outperform an appropriate low-cost alternative after costs, taxes and risk over a sufficiently long period. Some investors will meet that standard, but many will not, just as many professional active funds fail to beat their benchmarks. A process that cannot explain its benchmark, its source of expected advantage and its risk controls is relying more on hope than on an investment method.

There is also no requirement to beat mutual funds in order to invest successfully. A diversified fund that fits an investor’s goals can be a better choice than a self-managed portfolio that demands constant attention, and a disciplined individual strategy can be preferable to an expensive fund with no convincing reason to expect added value. The decision should be based on what improves the investor’s portfolio, not on winning a contest against professional managers.