Word: indexable
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...costs eat you up," says John Bogle, a low-fee fanatic and chairman of mutual-fund company Vanguard Group, which champions "index funds" as the surest road to long-term investment success. Over long periods, Bogle says, it's inevitable that managed funds will trail the benchmarks by roughly 2 percentage points a year, reflecting their costs. But index funds such as Vanguard's Index 500, which mimics the S&P 500 by owning essentially the same stocks, have low fee structures and allow individuals to easily approximate the market's average return year after year. Last year the Index...
...last few years are clearly unique," says investing legend Peter Lynch, vice chairman of fund company Fidelity Management Research. "Huge companies have been beloved." In that environment, fund managers with even small doses of non-index stocks don't have much chance of beating the indexes. But, Lynch notes, active fund managers have sparkled at times, as in 1991-93, when the postrecession economy was lifting small stocks fastest. In 1991 the average fund rose 37%, vs. 30% for the S&P 500, and 60% of funds beat the benchmark...
Lynch believes index funds make sense for investors who would otherwise switch their money furiously, chasing the latest fund fad only to get there late each time. Indeed, Fidelity is doubling its index-fund offerings from three to six this year. But, Lynch says, it's wrong to assume large stocks will be in favor forever. "That's not the history of the stock market," he says. "And it won't be true the next 30 years either. Giant companies...
That's when managers looking outside the index stocks could regain the advantage. Now may be the wrong time to lurch into index funds. "They've outperformed a long time," Lipper says. "And the history of the market is regression to the mean"--meaning some other segment may be ready to do better as index stocks come back to earth...
...always, what will happen next is impossible to say. What's clear is that the indexes have been trouncing the typical stock fund for a long time. Even if this era of big-stock bias fades soon, the fee fest that comes with actively managed funds is a lot to overcome. Your odds are good in a fund with a steady manager and a superior record. But if you find yourself paying fund managers who can't find the ocean from the beach, index funds are a solid alternative...