Index vs managed funds the great war

sixpence.
sixpence. Posts: 295 Forumite
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edited 4 January 2018 at 8:32PM in Savings & investments
Hello hello

I have been researching index funds versus managed funds, as an investing newbie. There seems to be general war between investors who believe that one is better than the other. I am in the process of rebalancing my portfolio (will be approx 24k in total in an ISA).

I am thinking of favouring index sums but adding in some managed funds for the wow factor: 88% in mixed Index funds [70% Vanguard 60, 10% Asia pacific ex Japan, 8% global tech] and 12% in "rouge" managed funds [3% Emerging Markets, 3% UK small businesses, 3% UK growth 3% China]

Do people on here have an opinion either way on which is better? Currently reading John C. Bogle's The Little Book of Common Sense Investing which is all about how much better index funds are.

EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.
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Comments

  • ColdIron
    ColdIron Posts: 9,011 Forumite
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    sixpence. wrote: »
    EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.
    You need to read some other books
  • fun4everyone
    fun4everyone Posts: 2,338 Forumite
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    There should not be a war, despite it being a repeated argument. Both have their uses.

    The real truth is that active funds are better in some areas and passive funds are better in others. Build your portfolio accordingly and use actives to give the direction you want where managers can add performance. Use passives in sectors where they are the better option.
  • ivormonee
    ivormonee Posts: 395 Forumite
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    The jury's out on this one, and has been for a number of years. There's compelling evidence that is claimed by both sides and I'm not sure which to believe or which is the most credible; both put forward valid arguments, and you've already discovered some on the side of passives from the book you mentioned.
  • OldMusicGuy
    OldMusicGuy Posts: 1,756 Forumite
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    I have both passive and active funds in my portfolio. It's not an either/or situation. It depends what your investment objectives are. A lot of it also comes down to your own personal opinion.
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
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    sixpence. wrote: »

    Do people on here have an opinion either way on which is better?

    Neither. Both serve their purposes. Nor can managed funds cover all markets. For most investors a mix and match approach is best. Outside of the US markets. There's far more opportunity to exploit pricing anomalies as well.

    Also much depends on personal circumstances. In summary I have accrued an above basic state pension and have DB pensions in place (continuing to accrue further guaranteed benefits in one). With this sound base. I can afford to use my SIPP (which I also continue to contribute too) to adopt a higher risk profile.

    Closer to your age I was far more conservative in my investing stance. Only risk what you can afford to lose.
  • sixpence.
    sixpence. Posts: 295 Forumite
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    Thrugelmir wrote: »
    Closer to your age I was far more conservative in my investing stance. Only risk what you can afford to lose.

    Would be interested to know what approach you adopted and why, if you feel like sharing it.
    The real truth is that active funds are better in some areas and passive funds are better in others. Build your portfolio accordingly and use actives to give the direction you want where managers can add performance. Use passives in sectors where they are the better option.

    Is there a way of researching which sectors are better for index funds? I can see how for a more stable economy like the US I would use an index fund, but for say China a managed fund might be best.
    ColdIron wrote: »
    You need to read some other books

    Do you have any recommendations? So far have been doing online research/bought a few books and checking out YouTube as well. If you have any suggestions that would be appreciated. I have already had a look at the previous book thread on here, so no need to flag that up.
  • bostonerimus
    bostonerimus Posts: 5,617 Forumite
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    My approach has been to use indexes and rebalance to a set asset allocation. That has netted me an annual average return of 8.5% for the last 30 years and 17% return in 2017. I look at the mathematics and it convinces me that you are far better to keep costs down with indexes and maximize the probability of success rather than use active funds in an effort to maximize return. You must remember that if you use indexes you'll always hear from the active investors that have beaten you, but never from those than have done worse.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • You can of course do your own analysis, by looking at fund performance over the past ten years across a range of markets and sectors. There are plenty of online fund comparison tools available. I use You Invest’s being a customer but you can too. Then draw your own conclusions.

    I am always surprised that academic research appears to favour index funds, but that may be due to the way they analyse the data. My belief is that active funds need not be more volatile, and can markedly outperform the index. Most don’t of course.

    Note that many markets and sectors do not have index funds, so if you want exposure to them, active is the only choice.
  • ValiantSon
    ValiantSon Posts: 2,586 Forumite
    sixpence. wrote: »
    EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.

    The policemen look like they haven't started shaving; I can't name you a single artist in the charts; I still buy CDs - and call them records; and tut about the youth of today. Now I have to add something else to the list of things that make me an "older" person. ;)

    Sorry, not much help to you, but I feel so very old now. Best go and make a cup of cocoa and go to bed.... if my old bones will get me there.
  • TBC15
    TBC15 Posts: 1,452 Forumite
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    There is a small skirmish going on over here

    http://forums.moneysavingexpert.com/showthread.php?t=5719527

    That might interest you.
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