This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance. Use the drop-down menu above to consider other financial conundrums and the right answers for you; share your own experiences and insights in the Discuss field at the bottom of this page.
Buy index funds if pretty good is good enough for you. Index funds are designed to mirror a market (such as the overall U.S. stock market or the bond market) or a market segment, such as undervalued, small-company stocks. Because, among other things, index funds usually have much lower expenses than managed funds, index funds tend to beat most actively run funds over time.
Buy actively managed funds if you want to take a shot at beating the returns of the index-fund crowd. It’s possible to do that if you have the time, interest and ability to pick active funds. But it takes discipline: Will you be able to stick with a fund when it has a subpar year, for example? And you’ll need the skill to tell when a fund truly goes bad and sell it.