Index funds vs managed funds: what should I choose?

There is a definite bias in my answer to the first part of your question regarding indexing versus active management. My question to you is do you really know what indexes you own? Here's why I ask. There are many S&P 500 index funds available, both mutual funds and ETF's. They all own the same 500 stocks. Yet S&P 500 equal weighted funds or ETF's have for several years now, appreciated more annually than their capitalization weighted cousins. The same is true for small cap stocks. Which index do you own and why?

The second part of my answer may not be as direct on the surface. As an example,if you want to build a bookcase, you know how many books you want it to hold. You know what space the shelves have to fit into. You have an idea of whether you want to build it out of cinder blocks and rough lumber or good finished wood. Before you go out to buy the supplies, you'll probably write down everything you'll need/want, and then work towards the finished product.

If you're like most investors I've worked with, you've never gone through the same thought process with your investments. You've never sat down and thought out why you are investing, what you consider a good rate of return, what securities you will (and won't) own. You haven't set benchmarks to measure your performance or decided hw often you'll review your progress. Going back to the bookcase, you probably spent more time "constructing" the bookcase than you have constructing your portfolio. Yet, which is more important? And, if you are a carpenter or ever took woodshop in high school, you can probably build the bookcase by yourself. If you don't take woodshop, you may want some professional help with your project.

Your indexing appraoch to the market is viable. But it needs to be done within the context of an overall plan. And, if you go through the basic portfolio planning process I described, you'll know when it's time to adjust.

Best wishes with your "project".

PS. I took woodshop and can help with your solution.