Re: Why Mutual Funds are better than Index Funds
There are fund categories for a reason!
Small cap and mid cap funds/indexes have a long record of beating the large cap (ie SP500). This goes back to the Law of diminishing returns again. Larger companies just cant grow as fast as smaller ones.
That is why cat said that comparing a multi-cap value fund to the SP500 was apples and oranges.
A smart investor will diverify across capitalization, growth vs value, sectors, international, etc
However, many investors dont take the time to do their homework and therefore the recommedation for them is to stick to an index fund, as the higher performance of other funds also comes with higher volatility.
It is fairly comonly known that a high percentage of people allocate their funds in their 401K in the same manner as the example portfolios presented at their companies 401K info sessions, simply because they figure the guy doing the presenting must know more than they do.
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