Large Cap Mutual Funds or Index Funds

[mwgr5]

I'm seventeen years old and am assembling a 10k portfolio of mutual funds in Roth IRAs. I am currently choosing how to invest in the large cap area. I have decided to either invest in a large value and large growth mutual fund or to invest in an index fund, such as one that tracks the S&P 500. I am not sure which route to go because the money invested will be in Roth IRA accounts so the investments will be very long term. The long-term nature of the investments worries me about investing in mutual funds because of the uncertainty of future management and performance. Also, most large cap mutual funds do not outperform index funds, and index funds have much lower expenses. However, the tax efficiency of an index fund would be negated because of the Roth IRA, and the higher return possible through mutual funds run by skilled managers like Bill Miller is tempting. As you can see, I need some suggestions. Thanks.

[Czech_Razor]

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The higher return possible through mutual funds run by skilled managers like Bill Miller is tempting.

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The problem with this is it presupposes that you can identify the outperformers in advance. But can you (http://www.ifa.com/12steps/Step5/)?

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The tax efficiency of an index fund would be negated because of the Roth IRA

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Tax efficiency may be mooted, but the long-term cost advantage of the index fund remains. Granted, once your portfolio is large enough that you hold other, less tax efficient assets (e.g., IJS (http://quicktake.morningstar.com/ETF/Snapshot.asp?Country=USA&Symbol=IJS&fdtab=snapshot ) and VGSIX (http://quicktake.morningstar.com/Fund/Snapshot.asp?Country=USA&pgid=hetopquote&Symbol=VG SIX)), you will want to shelter them, holding large blend-growth in taxable accounts, but for now, you're fine.

The Vanguard diehards (http://diehards.org/) will doubtless have more to say, and say it better than I.

FWIW,

Anthony

[edtost]

Until you can come up with a better plan on your own, index funds are pretty clearly the best choice.

[alekhine8]

You can invest in an S&P 500 index fund at Vanguard/Fidelity with an expense ratio under 0.20%.

That has beaten the majority of mutual funds in the past, and will continue to do so in the long-term. You won't second-guess yourself (is this fund manager any good? should I switch to another?).

[buffett]

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Roth IRAs....Roth IRA accounts

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You have $10k spread out among multiple Roth IRAs?

[buffett]

Quote from this month's Kiplinger's interview of Charlie Munger:

Q: How should most individual investors invest?
A: Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund. I think that works better than relying on your stock broker. The people who are telling you to do something else are all being paid by commissions or fees. The result is that while index fund investing is becoming more and more popular, by and large it's not the individual investors that are doing it. It's the institutions.

Q: What about people who want to pick stocks?
A: You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge.

[Sniper]

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You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market.

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He could have said that about Poker /images/graemlins/wink.gif