| Those of you who have just started investing | | | | problem? Unfortunately, the vast majority of |
| may have heard the terms "actively-managed | | | | actively-managed mutual funds fail to outperform |
| mutual fund" and "index fund" thrown around by | | | | the market, which is usually measured by the |
| personal finance advice columnists, bloggers, and | | | | S&P 500 index. That doesn't stop them from |
| the financial media. This financial jargon may sound | | | | charging large fees, however. Actively-managed |
| like Greek to you, and intentionally so, since the | | | | funds are like going to Vegas: you could win big, |
| financial media needs for investing to seem | | | | but you probably won't. In most cases, you'd be |
| difficult in order to continue selling newspapers and | | | | better off not trying. |
| magazines. The truth is, investing is easy, and | | | | Index funds, by contrast, merely seek to match |
| learning the difference between actively-managed | | | | the market. For example, an S&P 500 index |
| and index mutual funds could very well be your | | | | fund will merely buy the same stocks in the same |
| first step towards financial prosperity. | | | | proportions as the index and leave it at that. Since |
| The Two Flavors Of Mutual Funds | | | | they don't have to hire expensive managers, |
| Mutual funds basically come in two flavors: | | | | index funds are very inexpensive relatively to |
| actively managed and index. Both own a | | | | actively-managed funds, and generally outperform |
| diversified portfolio of stocks or bonds and both | | | | them as well due to that same cost advantage. |
| pool the money of millions of investors around the | | | | The downside is that it is impossible to |
| nation into one large fund, giving investors wide | | | | outperform the market. With index funds, you |
| diversification for a relatively small amount of | | | | have to take your pick: would you prefer average |
| money. | | | | returns with no shot of beating the market using |
| Actively managed mutual funds are the more | | | | index funds or mostly below-average returns with |
| glamourous of the two. Managed funds have one | | | | a shot at above-average returns using managed |
| goal: to obtain above-average returns, often | | | | funds? Vanguard is the company responsible for |
| paying hot-shot managers outrageous sums of | | | | inventing index funds and is still by far the most |
| money for a shot at winning big. So what's the | | | | respected in the industry. |