Of all of the questions that have confronted man since the dawn of time, the most oft-repeated and enduring one is probably, "What's for dinner?" A close second is, "Why isn't there anything decent on TV tonight?" Now, a new question increasingly crowds its way into mainstream conversation: "Which mutual fund should I go with?"
Generally speaking, the right answer is a type of Index fund.
What are index funds?
That stock index funds outperform the vast majority of actively managed equity mutual funds over the long term is something virtually everyone involved in the mutual fund industry knows -- but it's not something that they'll tell you.
Aside from being the best performing funds, what are stock index funds? Stock index funds seek to match the returns of a specified stock benchmark or index. An index fund simply seeks to match "the market" by buying representative amounts of each stock in the index, rather than hiring a manager to make bets on individual stocks or sectors or investment strategies. Index funds do not even attempt to beat the equities market, they simply seek to come as close as possible to equaling it.
Sound simple? Sound like aiming too low? It isn't. The majority actively managed equity mutual funds over time lose to the market averages. Many of the funds that do beat the average market return typically do so for only a very short period of time, and then quickly reverse course.
A lot of people think that the most popular index, the S&P 500, is the only index. It isn't. Index funds that match the broader market, such as the Wilshire 5000, can also excellent places to invest. There are even index funds that match the returns of foreign markets, bond markets, and real estate markets.
Yes, some actively managed funds do outperform the index funds. And you'll find Fools the world over investing in them. But we think the foundation of your portfolio should be based on index funds. From there, you can branch out to actively managed funds and, if you like, individual stocks.
How do you stack the odds in your favor that you'll pick an index-beating fund? And what if your plan is one of many that doesn't offer an index fund? Read on.