J asked in Business & FinanceInvesting · 10 years ago

IRA allocations: Should i have majority in Index funds, or actively managed funds?

i am 44 and have about 23 years 'till retirement. What is best going with cheap Index funds or slightly more expensive (but cheaper than others Morningstar 4-5 star rated) or a combination of both?

thanks.

Update:

I am looking for Growth overall, but not Aggressive Growth, more Moderate

4 Answers

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  • John W
    Lv 7
    10 years ago
    Favorite Answer

    What you want is to proportion your portfolio by risk. The most general categories is stocks for at risk and bonds for relatively risk free. It's generally acknowledged that bonds are less risky than stocks but a 25% stock, 75% stock portfolio actually has less risk and higher returns than a 100% bonds portfolio. A 50/50 portfolio has the same risk and much higher returns than a 100% bond portfolio. The graph is often referred to as the Markowitz bullet due to it's shape and is also known as the efficient frontier. Portfolios that have more than 50% stocks do produce more return but on an ever diminishing return basis while still incurring risk. At some point the risk will be such that the volatility will wipe out any gains that you may have had. That point is difficult to estimate but you should stay short of that point hence it's usually best to go with a 50/50 portfolio which is considered a moderate portfolio.

    Index funds are good in that they are simple formulaic funds which have the lowest fees and don't subject you to the risk that the management may not be all they claim to be. However an index fund is by definition a 100% stock portfolio so you have to balance an index fund with an equal investment in a bond fund and rebalance between the two annually and after major market movements such as a crash. Fortunately, bond funds are equally formulaic and low management fees. With a managed fund, the fund manager takes care of the rebalancing for you however many managed funds will have asset allocations that are also 100% or close to 100% stocks, these funds can do nothing in a correlated market drop so you have to ask yourself why pay for the fund to be managed is the asset allocations does not hold anything in reserve for them to manage with.

    The word Growth is misleading in fund nomenclature, growth refers to stocks that do not pay dividends hence investor return can only be realized through appreciation in stock value representative of growth of the business. Growth does not imply that your investment will grow more than any other investment opportunity, just that the returns will be realized purely from capital gains and not from dividend distribution. It doesn't really seem reasonable to handicap a fund to only growth stocks simply because the word growth has the implied connotation of investment growth.

    If you do opt for managed funds, look for an asset allocation that actually allows the fund manager to do something, a low fee and a high sharp ratio.

    You can probably get the same effect as most managed funds by simply proportioning between an index fund and a bond fund yourself but that requires that you rebalance at least once a year.

  • sarwar
    Lv 4
    4 years ago

    Actively controlled vs Index money debate is an age previous one and could proceed for the foreseeable destiny. First a number of key arguments from lively administration proponents: a million. Proponents of lively administration argue that index money are extra volatile considering that they're constantly completely invested interior the marketplace with out regard to valuations. lively manages can cut back their exposure if valuations are extreme and could carry money as mandatory. 2. lively proponents say that the way maximum present indexes are outfitted are defective, considering that indexes are capitalization weighed. which potential shares with larger capitalization get larger weighting interior the index. So in that admire indexing is unquestionably momentum play. 3. Markets are no longer efficient. How can markets be efficient while the Dow replaced into at 14000 and in some months is going to under 8000? listed right here are some observations from the inexers: the biggest reward of indexing comes from low administration expenses, tax performance and coffee transaction expenses. Over an prolonged quantity of time those ingredient weigh very heavily on the easily investor returns. equivalent weighed indexes are actual having a wager on small cap and value shares in comparison to cap weighed indexes. interior the final decade equivalent weighed indexes beat cap weighed ones. that's by way of fact final decade replaced into stable for small and value shares. this might ameliorations interior the subsequent decade. that's real that index money could be extra volatile as they're constantly completely invested. however the data coach that over the long term (15+ years) index money beat maximum lively money. no you will constantly be terrific approximately while the marketplace is overrated or undervalued. lively managers might miss opportunities while marketplace soars like in 2009 or they might make investments heavily in financial shares on the hight of hypothesis like in 2007: occasion circumvent and Cox, an extremely respected fund organization. additionally for lively money there is often the possibility of the celeb supervisor leaving. Indexing is stable for majority of individuals who're making an investment for the long term and preferrably making an investment using greenback value averaging. additionally for indexer that's the portfolio diversification this is extra significant. One must be nicely different and confident ought to hold some mounted earnings. For lively administration i could propose Balanced money.

  • 10 years ago

    Either would be a good way of building your portfolio. If you like low costs then go with index funds. If you want to try (I stress try), to outperform the market, then go with managed funds.

    For myself, my 401k is all index funds @ TR Price.

  • 10 years ago

    Check out Vanguard funds. They have many good funds

    both managed and index types for a small fee.

    Make sure to look at 401K were you work and Roth IRA

    on your own.

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