Last week I posted an entry on what it means to be a better investor nowadays after reading an article from Jason Zweig. The main message Mr. Zweig is sending is that investors will gain more by reducing investment costs. For average Joe and Jane, the simplest way to achieve that is using index funds. The advice isn’t new. From John Bogel to Warrent Buffett, they all advocate investing in low cost index funds that give investors the broadest coverage of the markets. In reality, however, that’s hardly the case.
We aren’t satisfied with 8% return from an index fund. Instead, we want double-digit gain. So we bet our money on hot funds invested in hot sectors. Technology, precious metal, real estate, and now international (especially China) funds. It’s our nature that we always want to get the most out of our money. The advice of investing in index funds is ignored, sometimes.
When I started buying mutual funds in 2001/2002, the markets were still searching for bottom and major indexes have posted consecutive years of declines. Instead of going to index funds, I picked several small-cap funds, added gold fund, even invested in a bond fund. Return was one of the reasons for using actively managed funds. Low initial investment also played a key role in the decision making (when it comes index funds, Vanguard always comes first and most of their funds require at $3,000 to begin with). Since then, my portfolio has changed a lot, but I still don’t have any index fund in taxable accounts. On the other hand, 6 out of 9 funds in our IRA accounts are Vanguard index funds since I know we won’t touch the accounts in another 20 to 30 years and keeping the cost low is always desirable. For taxable accounts, I don’t have a clear time frame and most of the funds I own have expense ratio (a measure of fund cost) that’s below 1%.
Now, I am interested in your take on this passive/active issue when investing in mutual funds with this poll. Do you consider yourself passive (using mostly index funds) or active (using mostly actively managed funds), or both?
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