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"There were years where they did beat the index funds, during those more turbulent years," says Michelson. "When you have those changing economic times, when you do look at your good fund managers, they're realigning their portfolio along with that."
Few heroes in active funds
Broad-brush results can be misleading, however. Although the study found that a majority of fund managers fail to pay for themselves and "beat the street," Morris says a few talented ones do so with some consistency. The trick is finding one.
"There are very few such talented managers; they're out there, but it takes time and effort to find them," she says.
To some degree, your investment style and objectives will dictate which approach best suits you. Indexing is a long-term strategy; you want to stay invested with your eye on that distant prize and not be detoured by short-term opportunities or market corrections. Actively managed funds, conversely, require a bit more daring and risk tolerance.
Michelson's advice: "Your first move ought to be into index funds because they're going to outperform the managed funds in general. Then diversify into some other areas -- small caps, internationals, bonds and real estate."
Pollan, however, prefers the earning potential of managed funds to the risk-avoidance of index funds.
"Should you have a percentage of your core in index funds because for the last 100 years the market has done well? That's like saying you should have a certain amount in cash. I think that's true from the point of view that you are reducing your risk, but if you want to be an active investor, you concentrate on what is being managed."
Morris maintains that index funds have one proven advantage over managed funds: "The expense ratio is one of the few data points we've found to be predictive of future performance; the lower the expense ratio, the better the performance, all things being equal," she says. "That gives index funds a huge advantage. They also keep their costs lower in another way; most index funds have low turnover, so that means their trading costs are also low."
Her advice: Don't be afraid to mix index and active funds. If you enjoy investing, there's a wealth of information, including analyst picks, available at Morningstar.
"If someone wants to manage
their own portfolio but they want a fairly
low-maintenance portfolio that they don't
have to spend a lot of time looking at, I
think index funds can be a great way to go,"
she says. "But you might be well advised
to seek out a good financial adviser that
you trust to help you locate the funds that
will meet your needs, and there may be active
funds in that mix. Both an active fund and
an index fund can meet an investor's needs."
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