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Not if they are in a taxable account because the unexpected capital gains distributions trigger income subject to tax. One way this can ruin your planning is if you plan to have income below an additional Medicare premium threshold (IRMAA), which for a retiree is typically total income plus tax exempt interest, And the unexpected capital gains distribution can ruin such planning and you have to pay additional Medicare premiums.
An (S&P 500) index fund is a core holding of mine, but it does have it’s own risk characteristics, such as elements of momentum investing, buying high and selling low, being subject to overall market sentiment etc.
For these reasons, I’m glad to own a high quality, managed value fund (Vanguard Wellington), which has its own risks, but they’re generally different from the risks of an index fund.
The benchmark, in my view, is not “beating the averages”, but “beating inflation”, and I’m not concerned if my value fund over or underperforms its benchmark index by a small amount, given the risk diversification.
I don’t have any actively-managed funds any more, though one of them might count as “index-plus”. From time to time, I see situations in which I think a wisely-run actively-managed fund would have special value. These situations usually appear in a volatile market where sectors are moving in different directions. An experienced active manager can identify places where an investor can put some money and gain some advantage by knowing which sectors are moving the right way (or at least not moving the wrong way). Index funds don’t slice like that. But I don’t view the opportunity I mentioned as a way to position yourself for the long-term.
Yes. Buying an actively managed mutual fund the right way is one way to learn about investing. The first three or four funds I invested in were actively managed. I learned what mutual funds were, how funds compared, dollar cost averaging, funds are volatile, the value of re-investing distributions, and holding for the long term. I have held several of those funds for 30 years, and they have been excellent investments.
I know lots of people who invest only in bank accounts and home ownership because that’s all they know. Using an actively managed mutual fund could teach them a lot about investing.
Make investing too complicated “active/passive management, indexing, high/low expenses” can scare people off.
Given current conditions, yes if you feel the need to have short-term bonds.
I am usually an individual stock guy. Sometimes I will buy a closed-end fund selling at its historically high discount. Been 95% stocks, 5% cash for decades. Social Security will be my fixed income. Today it would be like owning $2.3M in a 10-yr govt. bond. See no good reason to own any more fixed income. Obviously, stock market volatility doesn’t bother me.
As long as the costs (expense ratios) are low, that’s all that really matters. It appears that ex-US and EM funds can do fine or better than index funds, but you just have to be careful you don’t performance chase. It’s funny to look at the investment lineups in 401k plans – they often feature some index funds and a slew of the last 10 years’ hottest active funds. And guess what many participants go for… thankfully, target-date funds are becoming mainstays in plan lineups nowawadays.
I know the stats, but I only buy individual stocks or actively managed funds. I think the key is to have confidence in what you own so you don’t panic in the panics.
I would never recommend an actively managed fund. It is just too hard to beat the averages after expenses are considered. If you know you can generate an average return, why would you risk under-performing the market average?
I do think it makes sense on the bond side, and especially in the international bond space. If a bond index is market cap weighted, what you’re doing when you buy the index is to buy more of the most heavily indebted entities. That’s never struck me as a good idea.
I’ve never read any articles comparing the returns of index funds versus active funds. I suspect bond funds are not that different from stock funds.
Expenses matter and it is hard to beat averages over time.
Interesting point. What would you say is a decent management fee to pay for an active bond fund?
Excellent point. Arguably, you should own market-capitalization-weighted index funds when buying stocks, because a high stock market capitalization reflects investors’ collective vote of confidence. But large amounts of debt outstanding is another matter. While I don’t own fundamentally weighted bond index funds (those that might weight a nation’s bonds by measures like, say, GDP rather than the value of debt outstanding), I could see doing so if the funds were available at very low expense ratios.