The Perils of Investing in Index Funds

Index funds have been the stars of the bull market. But investors may get a nasty surprise in the next bear market.

A sea change has been quietly reshaping portfolios in recent years. Investors have been fleeing actively managed funds and flocking to index funds. In 2017 (through November), investors pulled $191 billion from actively managed U.S. stock funds and poured $198 billion into indexed U.S. stock funds, according to Morningstar, the investment research firm. Investors have, on net, withdrawn money from active U.S. stock funds and invested in U.S. stock index funds in every year since 2007. Those investors have likely been chasing strong relative performance among index funds. Not a single category of actively managed funds has managed to beat comparable index funds over the past 10 years through June 2017, according to Morningstar.

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Elizabeth Leary
Contributing Editor, Kiplinger's Personal Finance
Elizabeth Leary (née Ody) first joined Kiplinger in 2006 as a reporter, and has held various positions on staff and as a contributor in the years since. Her writing has also appeared in Barron's, BloombergBusinessweek, The Washington Post and other outlets.