I posed the question, “Are mutual funds or index funds better to invest in for the long-term” and I had quite a few people jump on me for my personal answer. At first I was a little ticked that no one saw my point of view, but then I began doing more research and thinking about the matter from adifferent perspective. I want to thank the readers of this site that contributed to the debate, because I am starting to re-evaluate my stance on index funds. Here are some good comments on this subject from Money Crasher readers:
I’ll add this Ã¢â‚¬Â¦ you’ll get MUCH more out of an investment plan that focuses on finding an asset allocation that fits your financial goals and risk tolerance, and the simply putting that asset allocation into action using low cost index funds with track records spanning 100+ years.
Do this instead of searching for “top managers” of active funds in each asset class hoping that they weren’t a flash in the pan, and hoping that they even stay on the job long enough to make a difference for you. Asset allocation is the investment strategy that pays off in the long term Ã¢â‚¬Â¦ not finding hot stock or bond pickers and constantly checking in to see if they stay hot. Seriously, I thought this ship had already sailed in the “Personal Finance” community.
A different perspective from Danny:
I would normally say index funds like most other bloggers..but I’m starting to lean towards mutual funds with good investment philosophies. The reason is because I don’t think the stock market will behave like it has for the past 3 decades. We’ve had a lot of booms and even Warren Buffett thinks those times are past us. So, for our generations it may be wiser to invest in funds that employ good managers to actually analyze data and make good decisions. I think market returns will be 6-7% annually max here on out. It can’t just keep going up forever. At some time, some one (like a manager) needs to spot undervalued funds and buy them, while selling off the bad stuff.
I am leaning towards this approach to the debate of actively managed mutual funds versus index funds from ekrabs:
. . . Please don’t get me wrong though. I am what in my circle would call “weapon agnostic”. As in, I do what makes the most sense to me, giving my current personal financial situation rather than what I think is better. For example, there are places for managed funds as well as index funds just as there are places for a hammer and a screwdriver. To me, it seems futile to debate whether one tool is better than the other. Not everything requires a hammer, and heaven help you if that’s all you believe inÃ¢â‚¬Â¦.
So, in practice, I actually do a bit of both, depending on what appears to work best for my own portfolio. However, for the average investor starting out, I would most definitely recommend index funds to start out, if there is a choice. In fact, I recommend to read “The Bogleheads’ Guide to Investing” for everyone who wants to get into investing!
One of my flaws from my preference towards solid, proven, actively managed funds versus funds that follow an index fund was the up-front sales charge called the “load”. All of the mutual funds that I invest in my 401(k) are class A loaded funds, which means it takes an up-front sales charge of 5.75 percent! I didn’t realize it was this high. I always knew index funds had very small expense ratios, but I didn’t realize that there are great performing index funds with no load. I starting to change my perspective towards keeping a mix of actively managed funds with index funds. The index funds will always keep you steady, and during the years that the actively managed funds beat the market, it’ gravey. But if they perform worse than the market, you’ll always have those low-expense index funds to keep you at a solid return for the year.
I’m going to spend the rest of the week looking into index funds more, revealing some actively managed funds that I think are worth the investment, and talk about opening up an IRA for those with a small initial investment.