Walter Updegrave at CNNMoney wades into the old index-versus-actively-managed-fund debate, and comes down squarely on the side of the indexers. Here's why:
Many (index funds) charge 0.2 percent a year or so, and some have expenses that are even lower, sometimes as low as 0.07 percent. That's a pittance compared with the 1 percent to 1.5 percent or more than most actively managed funds collect from investors.
Index funds slavishly follow an index or benchmark, so you always know what you're getting. You don't have to worry about your large-company fund manager poaching in small caps to juice his returns, or a value manager picking up a few growth stocks to boost performance when value stocks are on the outs.
Index funds tend to be tax-efficient, which is a fancy way of saying they generally give up less of their gains to taxes.
We think most index funds are fabulous for the very same reasons that Updegrave does, and for disengaged or inexperienced investors a well-diversified all-index portfolio is what we recommend. But when we're building portfolios for our private management clients and for the MAXadvisor Powerfund Portfolios, we use a mix of index and high-quality low-cost actively managed funds. Why? Because carefully chosen actively managed funds in out of favor areas can beat the indexes, and make up for their higher costs.
Index funds, for example, can seriously underperform actively managed funds when the largest stocks by market cap are not leading the market. Since the stock market peak in 2000, most actively managed funds have beaten the market cap weighted S&P 500. For more on this issue, read this seven-year-old article by MAXfunds co-founder Jonas Ferris which predicts that actively managed funds should start beating the indexes (which they did).
In Praise of Index Funds
Walter Updegrave at CNNMoney wades into the old index-versus-actively-managed-fund debate, and comes down squarely on the side of the indexers. Here's why:
We think most index funds are fabulous for the very same reasons that Updegrave does, and for disengaged or inexperienced investors a well-diversified all-index portfolio is what we recommend. But when we're building portfolios for our private management clients and for the MAXadvisor Powerfund Portfolios, we use a mix of index and high-quality low-cost actively managed funds. Why? Because carefully chosen actively managed funds in out of favor areas can beat the indexes, and make up for their higher costs.
Index funds, for example, can seriously underperform actively managed funds when the largest stocks by market cap are not leading the market. Since the stock market peak in 2000, most actively managed funds have beaten the market cap weighted S&P 500. For more on this issue, read this seven-year-old article by MAXfunds co-founder Jonas Ferris which predicts that actively managed funds should start beating the indexes (which they did).
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See also: Ask MAX: What's better: an index fund or an actively managed fund?