More Reasons to Invest in Index Funds

Make sure your active manager is working for you.

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Think your mutual fund manager can outrun the pack? You better really believe in him or her, because data spanning the past five years shows that nearly three-fourths of active managers have lagged their indexes over the past five years.

According to the just-released S&P Indices Versus Active Funds Scorecard for year-end 2008, the S&P 500 generated higher returns than 72 percent of actively managed large cap funds from the beginning of 2004 to the end of 2008.

Results were even worse for active managers in other major asset classes. Over that five-year period, the S&P MidCap 400 beat 79 percent of mid cap funds, and the S&P SmallCap 600 beat a whopping 86 percent of small cap funds. S&P found similar results in actively managed non-U.S. stock funds and in the majority of actively managed bond funds.

You might wonder if bear markets like this one sway the results. S&P says no: "The belief that bear markets favor active management is a myth. A majority of active funds in each of the nine domestic equity style boxes were outperformed by indexes in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes."