For a beginner choosing between mutual funds and individual stocks, the strongest recent number is a headline from S&P Dow Jones Indices: 79% of active US large-cap funds trailed the S&P 500 in 2025, up from 65% in 2024. That is one provider's measurement, and a separate working paper reaches a different reading of the same question. The useful question is which parts of the picture hold up, and what a first investment can reasonably rest on.
The answer is less dramatic than either headline. The fee arithmetic and the single-company risk point are the steadiest parts of the evidence. The claim that active managers reliably beat the market is the weakest, and the one most often assumed.
What the latest active-fund data shows
The 79% figure comes from S&P's SPIVA US Scorecard, which compares active funds with their benchmark over a calendar year. The 2025 result is the year-end figure; the 65% comparison point is the 2024 figure. These are S&P's own numbers, produced by the firm that also publishes the benchmark index, so they are a single provider's view rather than an independent audit.
S&P's persistence scorecard asks a different question: do funds that were above the median stay above it? In its five-year test, only 4.5% of above-median large-cap funds stayed persistently above median, where pure chance would produce 6.25%. In other words, good relative performance in one period was not a reliable predictor of good performance in the next, and the persistence scorecard reports fewer repeat winners than chance would give. The persistence and year-end results come from separate S&P reports, so they should not be merged into one figure.
The long-standing argument about single stocks
The fund question is recent; the stock question is older. Hendrik Bessembinder's 2018 study of US stocks from 1926 to 2016 looked at individual company returns over their lifetimes and compared them with one-month Treasury bills. His paper's headline finding is that most individual stocks did not beat Treasury bills over their lives, and that a small number of stocks accounted for the bulk of the market's total wealth creation. The paper is the primary source for both points. Published summaries quote different percentages for the share of stocks that underperformed, because the result depends on the horizon, the benchmark and whether dividends are counted. This article uses the qualitative finding and does not repeat a percentage taken from a summary.
Why the 56% reading is contested
A working paper by Cremers, Fulkerson and Riley, posted to SSRN in 2026, argues that SPIVA's methodology understates how well active funds do. It reports that 56% of assets in active US equity funds underperformed equivalent passive funds in 2024. Two features of that number matter. It is a share of assets, not a share of funds, so large funds carry more weight than small ones. And it measures a different year and a different weighting than S&P's 79%. The two figures can both be accurate descriptions of different things, which is why the disagreement is about method as much as about results. The paper has not been peer-reviewed, and the research available here does not show that its method has been accepted by S&P or by other researchers.
Funds versus stocks: what the structure does
A stock is a share in one company, so its outcome rests on that firm's fortunes. A mutual fund pools investors' money into many holdings, and the holdings determine the result. An index fund follows a benchmark and so holds a broad set of companies by rule. An actively managed fund's manager chooses the holdings, which adds a judgement layer and a cost. The SEC's international-investing bulletin states that funds provide more diversification than most individual investors could build alone; that statement is made in an international-investing context and is not a general claim about all funds.
Diversification removes company-specific risk, not market risk. A broad fund still falls when the market falls. That is the most common misreading of "funds are safer," and it is why the word safer needs a qualifier.
How fees compound against you
Fund costs come in several forms. The SEC describes transaction fees and ongoing fees, and notes that mutual funds commonly include both. The ongoing charge is the expense ratio, which is taken from the fund's assets each year, so an investor pays it whether the fund gains or loses. An expense ratio of 0.30% means $30 a year per $10,000 invested.
Compounding is what makes small percentages matter. Saxo Bank's illustration takes $100,000 growing at a 7% gross return for 20 years. With a 1% annual fee, the hypothetical ends at about $320,713. Saxo presents this as an illustration of how fees compound, not as a measured result. The 0.2% comparison that the brief asked for is not included here, because the Saxo figure for that case was not checked against the page.
Reading a fund's fee disclosure
Look at the expense ratio first. Then check whether the fund charges a sales charge on purchase, a charge on sale, or an exit load for selling within a set period. Exit loads can discourage quick selling, which may suit some investors, but they are still a cost. Share classes of the same fund can carry different sales charges, so the same portfolio can cost different amounts depending on which class you buy.
Comparing costs across funds
Compare funds with similar holdings and similar benchmarks. A low expense ratio on a fund that tracks a different market is not a like-for-like comparison.
Are individual stocks worth it for a beginner?
Single stocks add concentration risk and require time for research and monitoring. Bessembinder's finding that a small share of stocks accounts for most of the market's total gain has a practical consequence. A beginner who holds a few stocks is betting that one of them belongs to that small group, and the paper gives no basis for identifying those companies in advance. The sources reviewed here do not establish how many stocks a portfolio needs to be diversified, so this article gives no number.
Holding both: a middle path
The choice does not have to be either-or. A common approach is core-plus-satellite: a diversified fund as the core, with a smaller allocation to individual stocks. The source for this approach is a low-quality personal blog, and the research did not find an authoritative source for it, so treat it as a description of a practice rather than a recommended method. Consumer-finance site Bankrate's suggestion that beginners with small sums start with index funds and regular contributions is opinion, and the page was not opened for this article. Minimum investments and pricing rules vary by fund and broker and were not verified here, so check the specific product before buying.
Evidence assessment
- Strongly supported: the structural difference between owning one company and owning a pool of holdings, and the general principle that fees reduce what an investor keeps, as described in SEC investor material (the exact wording still needs confirmation).
- Moderately supported: S&P's finding that 79% of active US large-cap funds trailed the S&P 500 in 2025, up from 65% in 2024, which is one provider's single-year measurement; and Bessembinder's finding that most individual US stocks did not beat one-month Treasury bills over their lifetimes, using 1926 to 2016 data.
- Weak or preliminary: the 56%-of-assets reanalysis, a working paper not yet peer-reviewed; the core-plus-satellite approach, which rests on a blog; Bankrate's beginner advice, which is opinion; and the Saxo compounding example, which is a hypothetical.
- Unknown here: current US minimum investments and fund pricing timing; US tax treatment of fund distributions compared with stock trades; how mutual funds compare with ETFs; and how many stocks diversify a portfolio.
Practical implications
For a first investment, a broadly diversified fund is a simpler starting point than a handful of stocks, provided you accept that it falls when the market falls. Compare expense ratios and sales charges before buying, and read which share class you are being offered. If you add individual stocks, size that money at an amount you could lose without changing your plans. Given the contested SPIVA evidence, do not assume that an active fund will outperform the market, and treat any manager's recent record as weak evidence about the next period.
Limitations and open questions
The S&P figures come from one provider, and the 2025 year-end data is the most recent found for this article; newer SPIVA releases may exist. The 56% reading is an unreviewed working paper that uses a different weighting. Bessembinder's percentages depend on horizon and benchmark, and the fee example is hypothetical. Open questions include whether the year-end and asset-weighted measures converge under a shared method, and whether the active-fund results carry over to other markets and periods. The US tax and minimum-investment questions remain unanswered in this article.
Editor's take
The evidence supports a narrower conclusion than many beginner guides give. It supports the claim that single companies concentrate risk, that fees compound against the investor, and that the active-fund advantage is not something a beginner can assume. It does not establish that funds are a better choice for most beginners in general, since the research did not test that comparison directly.
The recommendation that follows, a broadly diversified low-cost fund as the default with individual stocks as an optional and capped addition, is the editorial judgement of this article, not a finding from the sources. It rests on the steadier points above, and it does not depend on the contested 56% figure. A reader who wants more certainty would need the tax and minimum-investment checks that this article could not complete.