November 18, 2014
What is the difference between a managed mutual fund and an index mutual fund? Why should you care?
What is the difference between a managed mutual fund and an index mutual fund? Why should you care?
The biggest difference is the cost. A managed mutual has someone picking and guessing what stock to get which has more costs then having an index mutual fund that just has a little of everything that doesnt change. You need to lower the costs you pay the best you can so you get the full return on your money.
A managed index fund, the stocks are managed by someone for a fee. A index mutual fund is not managed by someone and is widely diversified among many stocks. You should care because the managed fund is much more risky. The person who is managing the managed mutual fund could choose bad stocks and you could loose money.
Well said, gentlemen. Let’s review.
A managed fund is run by a person or many people as they try to pick the winning stocks or bonds.
An index fund simply owns an index like the S & P 500. It does not try to pick the winning stocks and bonds.
Empirical evidence has clearly identified index investing to be the superior choice over short and long term periods. Why? The yearly costs are dramatically lower (1.5% for a managed fund vs. .1% for an index fund for example). This is a very big hurdle to overcome for those “smart” managers. Most fail to do it and the one’s who do, don’t do it consistently.
You should care because ultimately it is the total return after costs that matters. An all index portfolio gives you the highest probability of success as you own index funds that diversify you all over the world in stocks and bonds at the lowest possible cost. Still not sure? Watch this: https://www.youtube.com/watch?v=9SbP_HyQlfk.