You’ve probably heard the statistics… most actively managed mutual fund managers rarely beat the market on a consistent long-term basis. They charge fees anywhere from 5 or 10 times or even 50 times more than index ETF/mutual funds which are designed to track the market. So why even invest any cash in actively managed mutual funds?
I firmly believe that most money for the average retail investor should be put into index ETFs/mutual funds, but I still do believe there is a place for an allocation to actively managed funds. Here are two major reasons why:
- Not all of them lag the market in returns. This might sound like a cop out but hear me out. There is some percentage (maybe 10 to 15%) of mutual fund managers who do outperform the market. If you do you due diligence, you might actually have a higher chance of finding them. You can look at track records (of course that is no guarantee for future success) as well as their strategy.
- They may limit losses in a down market. Although far from a guarantee, one would think that a manager can re-assess strategy if the market is falling and take advantage of the change in market. This can at least theoretically limit losses. In an index fund, there is no thought surrounding changing strategy according to market – but rather being in line with the market. This difference is worthwhile and serves to diversify your holdings which can help in down markets.
So yes, I’m a fan of index ETFs and index mutual funds for their low cost, tax efficiency and performance, but I still do believe there is a place some percentage of your portfolio to be in actively managed funds. But you need to be extra careful when choosing those actively managed funds. Try to understand their overall strategy, don’t accept a super high expense ratio (keep to ones under 1%), and stick to ones that have a good track record.
Although index funds, and specifically, index ETFs are the newer and better way to invest the bulk of your funds, I wouldn’t throw out the old way of active managed investing.
