Guidelines for having index and active funds in your portfolio

Daniel Wallick of Vanguard’s Investment Strategy Group explains that index funds are a good starting point, and that there are several factors to consider before choosing to invest in active funds as well.


Emily Farrell: Sanjay asked us, “Does it make sense to have both active and index funds in a portfolio? If so, when and why?” So the last question was a little bit of a vice versa question, so can we do both? Daniel?

Daniel Wallick: So if I’m building a portfolio for somebody and I don’t know anything about them, I would put them in an all index fund. And then to the extent that the individual investing is comfortable with the attributes that Hugh just described, right—talent, costs, and patience—if they think they can identify talented managers or their trusted advisor can, if they can acquire that at reasonable cost, and then if they can be patient with active, then active can potentially have a role in the portfolio also.

You’d need to make sure you’re comfortable, particularly with that variability through time because an active manager is actually trying to be different than the index.

Emily Farrell: Um-hmm.

Daniel Wallick: So sometimes they’ll be successful and sometimes they won’t. Right, there’s not going to be an absolute pattern of that. And so if you can be comfortable with those attributes and you can acquire it at the low cost and you think the manager’s talented, then there’s a potential role in the portfolio for that.

Emily Farrell: So indexing as a starting point and then assessing kind of your unique situation for tolerance, etc.

Daniel Wallick: Right.

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