Actively managed funds are generally considered better than passively managed ones. Moreover, you can choose an international fund to diversify your risk beyond the U.S. Market. If you’re still uncertain about your investment strategy, here are some things to consider:
In a recent study, the performance of actively managed stock funds was compared with the S&P 500 index. Generally, large-cap funds failed to beat the index 66% of the time, while mid and small-cap funds outperformed the benchmark by 82%. Domestic funds also outperformed benchmarks over a longer period. This shows that most investors prefer actively managed funds over index funds.
Mutual funds outperformed the market the year before beating the market the following year. According to research conducted by Wharton finance professor Robert F. Stambaugh and Carnegie Mellon professor Lubos Pastor, funds that outperformed the market tended to continue to outperform the market the following year. While active management does not guarantee market-beating performance, it can often uncover bargain investments.
International funds spread your risk beyond the U.S
Some domestic index funds offer some exposure to international stocks, but many experts disagree that these are enough to provide complete diversification. By investing only in stateside funds, you’re missing out on vast swaths of the world’s equity markets. International stocks make up 40% of the world’s equity market.
While investing in international markets can be a risky proposition, it can also help to boost your returns and protect your dollars from a domestic economic downturn. When the international markets grow faster, they can help prop up lower-performing U.S. stocks. Additionally, investing in international stocks reduces individual stocks’ currency and geopolitical risks. By diversifying your holdings internationally, you can protect your portfolio from currency moves, thereby reducing the volatility of your overall portfolio.
To learn more about fees, read the following. These fees are usually low, but some may have more expensive fees.
There are no-load mutual funds. This fund requires no load, so every dollar invested goes directly into the index fund. However, no-load funds require some work on the part of the investor. In addition to doing research and filling out forms, the investor will still have to pay a commission to the broker. This is unnecessary if you have enough time to perform your research. However, no-load funds are the best option for those who want low-cost investing.
Investing in a buy-and-hold strategy
A buy-and-hold strategy is a way to invest your money for the long term. By following this approach, you’ll invest in blue-chip stocks, which are highly likely to stay in business for many years. This strategy also involves sticking with an investment regardless of news or price fluctuations. However, you might want to make periodic checks because bad news about a stock can affect its share price, causing you to lose your investment.
This method is passive and can work in conjunction with index funds. Low-cost index funds track an index and offer a diverse basket of investments. However, this approach comes with disadvantages, such as the tax liability for capital gains incurred when selling a stock. The tax is dependent on how long you’ve owned the stock. For this reason, a buy-and-hold approach is an excellent option for passive investors.