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Unless you’re an expert on the stock market, you probably depend on others to guide your investment choices. If you invest in funds, that usually means choosing either an actively managed mutual fund or a passive index fund.
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Although index funds are popular among novice investors, money guru Dave Ramsey is a big believer in actively managed funds.
Ramsey shared that belief in a recent podcast, after a caller claimed Ramsey tries to “push people into” actively managed funds. The caller claimed that with an index fund, “They would have about 50% more money.”
Ramsey immediately pushed back against the claim.
“I’m not sure where you went to school for your math class but you failed,” he told the caller. “The S&P 500 funds are wonderful. The index funds are wonderful. They are not a cure-all, and there’s no possible scenario — unless you’re an absolute idiot in picking your actively managed funds — that you would have 50% more in an index fund.”
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Ramsey conceded that more than half of actively managed funds “underperform the indexes.” But he also suggested that savvy investors can overcome that by taking the time to research the performances of actively managed funds or consulting a financial advisor.
“The actively managed funds that I personally have picked have outperformed the indexes by more than 2% as a portfolio,” he said. “It’s fairly easy to study mutual funds and pick [those] that outperform. But if you’re not going to study them and you’re not going to have a good advisor in your corner, then using the index funds is a great idea.”
For those who need a quick primer: Passive funds are designed to keep pace with market returns by mirroring certain stock market segments or indexes, according to Vanguard. When you invest in an S&P 500 index fund, for example, you are putting your money into a passive fund that simply reflects the S&P 500’s performance.
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In contrast, actively managed funds include investments that are hand-picked by professional money managers with the aim of beating the overall market returns.
As a general rule, passive funds are the safer and more cost-efficient option. You pay more fees with actively managed funds and also face higher capital gains taxes because of more frequent trades by money managers. You’re also betting that the actively managed fund will beat the overall market — and facing the risk that it will fall well short. This is why you often see more money flowing into passive funds than actively managed ones.
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