The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 50. Active Funds

THOUSANDS OF HOURS are spent debating the merits of passive management—investing in a static portfolio that is usually designed to mimic a market index—versus active management—active security selection by a money manager. Most of these debates focus on the academic arguments for one versus the other. In fact, the issue is largely one of individual style. Remember the discussion on behavioral finance on p. 124?

Ross Levin, a financial planner from Minneapolis, said it best when he introduced a panel on active versus passive management at a financial planning conference. Levin said that he uses actively managed funds because he enjoys doing the research to find the funds. Active managers are more interesting to him and more interesting to his clients. Maybe they want to know which sports team the fund manager supports or his favorite restaurant. "Active managers keep my clients interested and keep them in the investment game," Levin said. Yet he acknowledged that if he preferred passive management he would no doubt attract clients who prefer passive funds. "What I think really matters is that you believe in what you're doing and have passion for it," Levin said.

Intellectually the argument for indexing is a strong one. I suspect most professionals accept it, as do most amateurs like me. Yet each and every one of us secretly believes that our guy will be the one to beat the odds.

Consider Burton G. Malkiel, author of A Random Walk Down Wall Street, a friend of ...