Finance and Economics > Investing and Saving

Index vs Actively Managed Funds

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Stein:
Just wondering who is a fan of Index Funds vs funds actively managed by someone?  No, this isn't a follow-up from the market timing debate, IF you decided to buy, what do you typically buy?

Myself, I have turned from active to index funds almost exclusively.  After reading a few books by Bogle (Vanguard founder), it really makes sense to me to seek the lowest cost way to invest.  This article also makes a pretty strong argument for regression to the mean.

http://finance.yahoo.com/news/How-The-Smart-Money-Turned-usnews-13808633.html

In particular, Bill Miller beat the market for 15 straight years, probably a record.  He got hammered so bad this year that his 10 year average return is now in the bottom 25% of all mutual funds.  Pretty much is a poster case for not being able to beat the average long term.

chris:
Active. I gave my money to Peter Schiff last year.

Jack Crabb:
Vanguard S&P 500 Index.  Set it and forget it.

Some fund managers can/will beat the index.  However, it is more a matter of luck.  The index posts better returns than the majority of fund managers.  The index does it at a lower cost.

Brian Preston, the Money Guy, had some interesting comments in his podcast a year or so ago.  The few large cap stocks are closely watched and the market is very efficient at pricing the stocks very close to value.  Therefore, paying a fund manager to run a large cap fund does not make much sense because there is no inefficiency to exploit for higher than market returns.  Small cap and mid cap stocks, however, are not as efficient so better than market returns are possible.

Of course, there is also the instance where the economist is walking down the street and sees a $5 bill on the sidewalk.  He does not pick it up because in an efficient market, someone would have already picked it up before him.

Allerion:
I use a combination of index funds and individual stocks.

My overall mix is about 90% stocks.
I have a small percentage in a balanced index that buys stocks and bonds and self-corrects to maintian a 50/50 mix.
I keep 1-2% in TIPS (Treasury Inflation-Protected Securities) just as a hedge against hyperinflation.  This is a highly questionable decision but when you look at cases where inflation runs away at least this should preserve enough wealth for me to eat. :)
I keep about 5% in cash equivalents.
Also, about half of my total wealth is OUTSIDE of retirement accounts and as I get older I expect that to be a larger percentage.  I don't want to end up in the situation some people I know are in where they have to take forced distributions from their 401k, pay taxes on it as ordinary income, and then they turn around and buy stocks with it again.

Most of my individual stocks are what I would call conservative dividend-paying stocks such as Pepsi and Unilever.
My biggest losers that I still hold are Goldman Sachs and Sears Holdings...oh and Royal Carribean Cruise Lines (OUCH).

I do own and continue to buy REITs despite expecting a decline in housing prices.  I expect rental rates to be strong or even climb since everyone getting foreclosed on has little choice but to rent for the next decade or so.

So to get to the point....Index funds are my preference.  ;)

Fib Posure:
In my opinion, index investing is really just another form of active investing. An index fund is only as good as the index it uses, and when you choose a specific index you are actively managing your investments. For example, if you invest in an index ETF that tracks the S&P500, you are actively choosing the S&P500, which is simply a group of large companies in America. You are completely ignoring small companies, foreign companies, real estate, and commodities. Of course, you can buy index ETFs for all these. My main point is don't put all your faith in one index.


--- Quote ---Vanguard S&P 500 Index.  Set it and forget it.
--- End quote ---
No foreign investments? Why so much faith in America?


--- Quote ---Of course, there is also the instance where the economist is walking down the street and sees a $5 bill on the sidewalk.  He does not pick it up because in an efficient market, someone would have already picked it up before him.
--- End quote ---
Not to mention the fact that if markets were efficient, Warren Buffett would be broke. During the dot com boom, worthless companies went up. This is clearly not efficient. But maybe in the long run an argument for efficiency can be made.

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