Paul Tanner, CFA, MBA

The above answers are definitely on target. Costs, including tax and trading, definitely favor index funds. They may not be glamorous but they provide you the highest odds of delivering performance over the long run.

Passively managed funds follow similar principles but may avoid a small downside of some index funds. When Wall Street can assess which stocks will replace and be removed from indexes, they will trade in advance which reduces the performance to the index fund owner. Passive fund managers, including Dimensional Fund Advisors (DFA) which must be purchased through an adviser, avoid this downside.

Not mentioned is a key question for those choosing funds actively managed (by stock and bond pickers as well as market timers): Is the investment manager's (superior) performance due to luck or skill? If it was skill, can you identify skillful managers in advance for the future? And, can you stick with a skillful manager when they hit a rough patch which could extend several years?

In my opinion, time is better spent on an investment plan (asset allocation) which fits well with your (1) resources (investments, income from work, etc.,) and which has reasonable return expectations
(2) spending needs (3) psychological ability to handle the periodic downturns in markets. If you are retired or retiring soon, a solid source of income which is not subject to the vagaries of the markets is important.

Hope this helps.

Miguel -- Michael's comments above are on target. Another way of thinking about it is that diversification reduces volatility which is a good thing. See http://granitehillcapital.com/blog/investing/a-better-way-to-invest-for-retirement Hope this helps. Paul

"Sensible investors pursue diversification as a policy to reduce risk, not chase performance. By following a disciplined policy of maintaining a well-diversified set of portfolio exposures, regardless of market zigs and zags, investors establish the conditions for long-run success." -- page 60 Unconventional Success: A Fundamental Approach to Personal Investment by David Swensen. http://en.wikipedia.org/wiki/David_F._Swensen. In other words, be careful about market timing -- there are lots of well-informed institutions in the market. While the outlook for Europe may now appear dark, for every share sold there is a share purchased. The known risks should be priced into the market.