Medicated Money

Monday, March 20, 2006

Asset Allocation - Managed Vs. Index

J.P Morgan, when asked what the stock market will do, replied: It will fluctuate!

As we have discuss earlier, my wife and I have started the beginning phases of changing our financial lives to better ourselves for the future. We have each started a 403(b) account through our employer that begin in Jan 2006. We decided to allow for the maximum contribute allowed, $15,000/yr each. We did a little research and choose a total of 8 mutual funds. 5 of these funds are managed mutual funds, 2 are index funds, and 1 is classified as
moderate allocation with holdings in 80% stocks and 20% bonds. All in all, the asset allocation looks like this:

  • U.S. Stocks - 61%
  • Foreign Stocks - 21%
  • Bonds - 11%
  • Cash - 7%
The managed mutual funds make up 90% of this allocation. We are currently trying to decided if we should be mostly investing in the higher expense fee managed funds or the lower fee index funds. We read the Morningstar Forums often, and there is quite a split between the Vanguards (pro-index funds) and others such as Fidelity (pro-managed). We just cannot figure out which one is the way to go. For right now, we plan on staying with our current picks due to the fine print of trading funds too often, and the fact that we want to become more educated on this subject before we make any decisions.


  • I am personally persuaded by the passive (indexing) approach. I would recommend the following books which include some of the academic studies which show the failure of active funds.

    "Common Sense of Mutual Funds" by John Bogle

    "The Four Pillars of Investing" by William Bernstein

    "A Random Walk Down Wall Street" by Burton Malkiel

    The gist of the argument is that active management is a zero sum gain where the winners are offset by the losers (picked the wrong fund). The evidence suggests that very few funds are long term winners over the index approach (there are always some short term winners, but they eventually underperform). On top of this, you end up paying a high expense ratio for the active fund, making even less likely to outperform the index.

    By Anonymous Anonymous, at 7:56 PM, March 20, 2006  

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