Once you know how much of your investments you want to put into stocks versus bonds and other vehicles, the central choice on stocks may be this: How much do you emphasize breadth and simplicity (covering all bases) versus the potential rewards of a more targeted approach to picking stocks?
In other words, do you focus entirely on "index funds" that passively track the overall stock market (or large portions of it), or on a mix of stocks selected by professional mutual fund managers or by yourself? Many people blend these two approaches.
Neither strategy is perfect. Neither is likely to be a winner when the market is tanking.
Indexing has some big virtues. You keep costs down, because you aren't paying fees to cover a lot of managerial decisionmaking. Fidelity's Spartan Total Market Index fund has an expense ratio of just 0.7 percent annually, for example.) Also, if some of your money is in taxable accounts, you won't incur as many capital gains taxes, because these funds essentially use a "buy and hold" strategy.
More important, index funds give you instant diversification. For instance, you could divide your money between a single broad-based fund that tracks the whole US stock market (from large companies to small ones), one that tracks foreign markets, and perhaps boost your holdings of small- and mid-size stocks by putting a little extra in an "extended market" index fund.
With that strategy, if Apple is doing well, you'll own some of it. If markets in Germany or India are hot, you'll own some of their stocks, too.
What do actively managed funds offer? On average, they hit you with higher fees and slightly lower returns than the overall stock market. But in a given year, some actively managed funds will be stellar performers. They can also help you target your own favored approach to investing, if you have one.
Also, In some cases they can offer strategies to cushion the downside risk of stocks. Some stock funds actively hedge market risks, rising a bit less when the market is soaring, but avoiding a sharp fall when a downdraft arrives. Other mutual funds, such as those called long-short funds, aim to rise in price even when the overall market may be flat, by buying (going long) on expected winning companies and "selling short" some expected losers.
Mark Sappenfield
Dear Reader,
About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:
“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”
If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.
But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.
The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.
We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”
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