Should You Invest in Actively Managed or Index Funds?

Low-cost index funds tend to outperform most actively managed funds over time. One smart solution: Strike a balance between the two.

(Image credit: scyther5)

This is the month when we present our annual rankings of mutual funds, in which actively managed funds predominate. So it may seem counterintuitive that we’re also featuring a story on indexing, which is all the rage among investors. As senior associate editor Nellie Huang observes in her story, actively managed funds consistently struggle to beat the indexes. Over the past 15 years, only 35% of actively managed large-company U.S. stock funds have beaten Standard & Poor’s 500-stock index. Little wonder that since 2010, investors have withdrawn a net $500 billion from actively managed U.S. stock funds and invested that amount in index-tracking mutual funds and exchange-traded funds. In a recent page one headline, the Wall Street Journal announced “The Dying Business of Picking Stocks.”

So why bother with the rankings? For one thing, there’s the perverse nature of the market. “It’s usually not a good sign when everyone is bullish on an investment or strategy. You can bet that that investment or strategy is doomed to fail or is at least headed into a period of disappointing performance,” says executive editor Manny Schiffres, who supervises our investing coverage.

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Janet Bodnar

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.