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Should You Opt Out of Actively Managed Mutual Funds for Passively Indexed Ones?

Our money mentor weighs in on whether you should switch to "passive investing," and why.

As Joe Kennedy supposedly said after a kid polishing his shoes told him, “Buy Hindenburg!”: When the shoeshine boy starts giving you stock tips, it’s time to unload your portfolio. That is, when everyone wants in on a stock, it’s a sure sign that shares are overpriced and about to fall, big time. 

But does this advice apply to the recent rush to sell out of actively managed mutual/hedge funds and snap up stocks through funds that track large-market indices? Probably not. 

If history’s any guide, the current madness for “passive investing” isn’t actually madness—it is common sense. Because markets incorporate the collective wisdom of all players, not just the one running your fund, only a fraction of professional investors ever beat the major indices. And by cracking down on so-called “insider information,” the feds have made it even more difficult to beat the markets. 

One more thing: Index funds are cheap—they carry almost no fees, especially if bought directly from an outfit like Vanguard—so the rush into index funds might signal a market top, or a sign that average investors are getting smart.

Charles Gasparino is a Senior Correspondent at Fox Business Network and a columnist for Men's Fitness. Follow him on Twitter.

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