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I've read your article on 401Ks. I get the impression you are herding everyone towards indexes, but what about high risk growth funds? I'm 22, maxed out my 401K, have 2 other mutual funds and all are in the high risk categories because I plan to invest monthly for a long period of time. It's this what people with long-term goals should do?

****DANA
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<<I've read your article on 401Ks. I get the impression you are herding everyone towards indexes,
but what about high risk growth funds? I'm 22, maxed out my 401K, have 2 other mutual funds
and all are in the high risk categories because I plan to invest monthly for a long period of time. It's
this what people with long-term goals should do?>>

Dana,

I don't know that we're "herding" anyone -- we're just reporting the data: index funds are far and away the most productive mutual funds out there. The low costs and the low turnover rates give index funds an advantage of roughly 2% annually over managed mutual funds -- though the differential may be growing due to the increase in expense ratios in managed mutual funds over the last twenty years.

I'm not sure what "high risk growth funds" are. Index funds are no less "risky" than any other mutual fund -- they just follow mechanical approaches to investing the money, and do so in cost effective ways. If you're asking whether large-cap growth funds are better than index funds, you really need to compare their returns to an index fund which is invested specifically in growth stocks. Vanguard Growth (VIGRX) is an index fund invested in stocks generally categorized as the "growth" half (as opposed to the "value" half ) of the S&P 500 stocks. Vanguard Growth has been destroying the returns of other managed large-cap growth funds.

If you think growth will outperform value over the next 40 or 50 years ("growth" has actually underperformed "value" historically, but by the tiniest of margins), than you would do well to compare your mutual funds' records over the recent past to that of VIGRX.

Best,

Bill
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Index funds have a place in any portfolio, but I also believe that there's room for international funds, small cap funds, and other funds that have a far higher level of risk, and a far higher reward potential as well.

I personally think that everyone that's more than ten years away from retirement should weight their funds towards higher rewarding investments, even if there's more risk involved.
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<<Index funds have a place in any portfolio, but I also believe that there's room for
international funds, small cap funds, and other funds that have a far higher level
of risk, and a far higher reward potential as well.

I personally think that everyone that's more than ten years away from retirement
should weight their funds towards higher rewarding investments, even if there's
more risk involved.>>

There may be confusion about what "index funds" are. Index funds aren't just for tracking the S&P 500 -- there are index funds to track any sector of the market you'd like -- and the more narrowly you define a sector (and therefore perhaps the "riskier" it is), the higher the degree to which index funds outperform managed funds that invest in that same sector.

Here's a link showing the math for index funds in the small cap sector and the international sector. If you're going to be buying a mutual fund for either of those sectors (not a terrible idea at all), the odds are very heavily against your picking a managed fund which is better than the index fund for such a sector. http://www.vanguard.com/educ/lib/bogle/rattle.html

Best,

Bill

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Yes, if you know your funds will outproform an index over the next 20 years, by all means stay out of the index funds. However most funds do worse then the index funds.
The only sure way I know of to perdict what the best investment over the next 30 years (you will retire in less then 30 years with it) involves religion and either vowing to poverty (without telling the seceret or taking advantage of it) or selling your soul to the devil. Neither look like good options to most people, and the devil isn't going to buy souls that he already owns.
(don't read the above to imply that the rich have sold thier soul. I never ascribe to malaice what can be ascribed to stupidity, sloth or dumb luck.)
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