Why Index Funds Are NOT the Best Answer

Myth #2: Index funds eliminate manager risk.

Whether it’s bonds or stocks, there is no such thing as an index fund that holds the entire market. It’s impossible.

So who decides what goes in the fund?

You guessed it: Managers.

In 2002, Vanguard’s bond index managers were trying to make up a bit for their expense-ratio headwind and instead got caught with an overweight in some horrific bonds. They missed their index bogey by a country mile.

Two of the best-known indexes in the world, the Dow Jones Industrial Average and the S&P 500, are composed of stocks picked by hand! You can’t tell me index funds don’t have manager risk.

Investing in index funds is one of seven costly mutual fund mistakes to avoid. See the complete list here.

Next: Myth #3 – Index funds never underperform.