Friday, June 16, 2006

Index funds are not so great right now

From The Big Picture, it's important to note that index funds only perform better than actively managed funds during a "secular bull market", whereby an investor holds for the very long term with the expectation that the end outcome of several bull/bear cycles will result in overall positive gains. And in the long-term there are certainly gains to be had; for example stocks will eventually return to the dot-com bubble era valuations. But a good individual investor or a well-managed fund can weather bear markets and recessions better than an index fund, as can be seen by the percentage of outperformers in these rough markets of the past 5 years.

This chart and analysis shows that the overall market can be flat for over a decade, where only careful and thoughtful investigation of where to invest will yield a positive return. A blind index won't always do the trick, so consider if you wish to rebalance your 401(k) or IRA. Again, I recommend large-cap stocks over small-cap for this next year or so.

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