Managed funds vs index funds

Re: Managed funds vs index funds

• bparkhur member

  

  January 2014

  DH and I started looking through all the funds in his 401IK after watching this fairly shocking documentary last night: http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

   

  Personally, I don't know enough about it to give you advice. We are going to research some of the funds in his account that had higher fees (some close to 2%!!! Watch the documentary to see how scary that is...).  We have wanted to invest in index funds for a while now, and now plan to do that this year.  BTW, there is probably a reason why the person at Lincoln Financial told your husband not to switch to index funds... (watch the documentary...)

   

  Sorry I can't be more helpful! I hope others weigh in!

  See my swapping feedback: http://bumpfeedback.proboards.com/index.cgi?board=ac&action=display&thread=13

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• Xstatic3333 member

  

  January 2014

  I think this is a personal choice. Many people are index fund devotees, largely because of the low costs, and invest in them over the whole course of their careers. I'm in managed funds currently, and will stay in them for the foreseeable future. I won't sell next year, or any given year, just because it's a bad year for the market.
  
  What I don't like about your advisor's advice is that it sounds like he's asking you to try to time the market, which average retirement investors like most of us should not be doing. We should pick funds based on one philosophy or another, stick with them for a while, and reallocate periodically based on risk level as we approach retirement.
  
  As you come up with your own personal philosophy, research is key. That documentary looks great. I also learned a lot from the website Money Under Thirty. Even if you're over 30, I'd recommend it because it simply explains different mutual fund classes and types.

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• jtmh2012 mod

  

  January 2014

  What you should be asking yourself is what are the rates of returns?  Fees aren't necessarily bad as long as it is still performing well and the fees aren't excessive.  If the rates of returns minus fees on your managed funds are beating the rates of returns on the index funds, then leave the money where it is.

  
  

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• hoffse member

  

  January 2014

  I agree 100% with Xstatic.  I don't think it's bad to have a mix, or even to be entirely in index funds if your risk tolerance is lower, but you don't want to constantly be jumping ship from one fund to another.  Some years your managed funds will beat the market.  Some years they won't.  Also keep in mind that a lot of managed funds have a minimum holding period to keep day-traders out.... so if you jump ship too soon you will owe a hefty penalty.

  
  

  The point is, you don't have to choose the absolute best fund every single time you invest. What you want to do is just have decent growth.  I think most retirement calculators estimate 6-7% of annual growth when they tell you how much to save.  Most also assume you are pulling out 4% of the total amount from your retirement each year as soon as you retire.  

  
  

  I use those benchmarks because I nearly always beat 6-7% just by sitting in my funds and letting them do what they do.  I bought some funds in October that have had 7% growth in 3 months.... not 12.  But in years where things aren't as awesome, I might not quite hit that threshold.  Point is, overall my funds tend to beat that estimate used by the calculators, and that allows me to be conservative in my own estimates about how much I need to save.  Are there people out there who make a far better return than I do?  Absolutely.  But I also do other things with my life, and as much as I enjoy talking about money, researching investments all day long is not my jam. If you spend too much time chasing funds, you're more likely to get burned for one reason or the other.

  
  

  Also, 1% seems kind of high.  I'm pretty sure most of my managed funds are 0.75% or less.  

  

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• nicolen08 member

  

  January 2014 edited January 2014

  Thanks for the tip about the documentary, bparkhur. Thanks for the website, xstatic3333. And thanks to all for weighing in.
  
  We still need to do more research, and I'm planning on reading a couple of books this month to try and learn more. But, I really like the idea of only using index funds. I know our returns could be higher with managed funds, but the idea of a bunch of hidden fees worries me. I'd rather just track the market, and rise and fall with it, without worrying about always trying to beat it and trying to make the fees justify the returns. If we end up with less, that's okay with me.
  
   I also don't know about staying with Lincoln. I don't know if they charge more than other places. Dh opened the account so young. He said he just asked some older guy at his work who he was invested with and chose that same place. I wish one of his parents would have gone with him to help him ask questions when he signed up for the account, but, luckily, we're looking into all this now when there's plenty of time to make the appropriate changes, if needed.
  
   We're going to also fully fund two Roth IRAs soon, so I'm excited about that. We figured out how much we need to lower our income using the 457 plan so that we qualify for more tax deductions, and the rest will go into Roths. We also decided to start paying an extra $800 on our mortgage each month to pay it off in the next ten years. I know we could invest that money in retirement, but we want to get rid of the mortgage. Paying off a mortgage by age 35 would be so amazing.

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• jtmh2012 mod

  

  January 2014

  nicolen08 said:

  I'd rather just track the market, and rise and fall with it, without worrying about always trying to beat it and trying to make the fees justify the returns. If we end up with less, that's okay with me.
  

  ....

  
  We also decided to start paying an extra $800 on our mortgage each month to pay it off in the next ten years. I know we could invest that money in retirement, but we want to get rid of the mortgage. Paying off a mortgage by age 35 would be so amazing.

  
  Just a note.....they're not "hidden" fees as long as you actually read the documentation they send you when you're investing in a new fund.

   

  Awesome to be able to pay off the mortgage.   I like to pay a little extra on mine as well as contributing money to what I call the "house fund".  Going to use it to pay off the mortgage when the amount in the account meets the mortgage.

  
  

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• mbecker03 member

  

  January 2014

  Active managers almost always lose to index funds over the long term. There's also no predictive power in past results. The fact that a manager has done well in the past has almost 0 relationship to how well he or she will do going forward. They do legitimate academic studies on this and the numbers are the same every year: http://momanddadmoney.com/the-experts-cant-pick-stocks-can-you/

  
  

  Over the long term you will be better off investing in index fund. Of course, Lincoln Financial and other companies like that will try to convince you otherwise because that's how they get paid.

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