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:

1. You don’t waste time researching which manager to pick
2. You don’t worry about a year of underperformance and if you should switch managers
3. You can automatically add funds each month with no ongoing effort

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:

• Should you pay a wealth manager or financial advisor to “actively” manage your portfolio?
• Are there scenarios where you recommend using actively managed funds?
• Why do so many people still invest in actively managed funds?

Resources:

• SPIVA Reports