Making A Case For Index Fund Portfolios

Richard Ferri and Alex Benke have recently published a great article entitled A Case For Index Fund Portfolios.  The article is available in this month's Journal of Index, here.  In essence, you are statistically much better off investing in a portfolio of index funds versus a portfolio of actively managed funds.  And as additional asset classes are added and as your holding period becomes longer, this index fund portfolio beats the portfolio of actively managed funds 90% of the time, even with low-cost actively managed funds.

Passive Mutual Funds Beat Active

There's an interesting paper on why indexes are a better investment than mutual funds. It's called "The Difficulty of Selecting Superior Mutual Fund Performance" and was in the 2006 February issue of the Journal of Financial Planning. The bullet points:

1. Few active mutual funds can consistently beat their respective indexes, but there are some that do.
   
2. Predicting which active mutual funds will outperform, however, is difficult, if not impossible.
3. The cost of selecting the wrong manager was high, and probably not worth the risk.
4. Active mutual funds provide significantly lower after-tax returns.

The only issue I have with this study is that it studies only 20 years (because there aren't many active mutual funds around longer), and in that period, stocks have been mostly on a tear. I'd be interested in how active mutual funds fare against the indexes in a sideways or down market.