With the advent of the index fund in the 1970s, the battle began: actively managed funds versus passive index funds. Which belongs in your investment portfolio?
Actively managed funds have people responsible for deciding which companies to invest in and include in the fund. These funds will typically have a strategy to invest in a certain sector or style such as US large-cap growth companies or emerging market companies.
Passive funds, on the other hand, use rules that define which companies to include in the fund. Examples include the S&P 500 (500 largest US companies) or the Russell 2000 Index (the smallest 2,000 companies in the Russell 3,000 index). These funds typically have very low ongoing expenses since no one is employed to actively research and make investment decisions.
This obviously begs the question: which is better for your investment dollars? The research is in: the chances of you picking an active fund that outperforms a passive index is very small. In virtually every category of public investments, the index funds outperform a majority of the actively managed funds.
Investing in low-cost index funds has other benefits as well:
It’s comforting to know that you will not only make more money over time but also spend less energy using passive index funds. Not often in life do we get such a win-win scenario.
Other topics discussed include:
Resources:
