We are early 30s, currently have about $130k in retirement funds
AWESOME! You are well ahead of peers!
mixture of traditional IRA, roth, converted old 403b plan to IRA, and 403b plan from current job, all in various stocks, a mixture of large cap, small cap, international, etc.
How and why did you acquire these? Was it part of a plan or just a "place and time" decision for each? You will hear reference to having an "Investment Plan" here and elsewhere. This plan guides everything that enters your portfolio (not just stocks and mutual funds BTW) as part of the well thought out and coherent plan. You will also hear about "re-balancing" your portfolio from time to time ( I do mine semi-annually) to bring it back into alignment with your goals. Lots of folks are selling equity assets (stocks and stock funds) right now and buying bonds or real estate or something else - this is due to to the big run up in the stock market throwing their portfolio out of balance - the value of equity exceeds the desired percentage in their plan's asset mix due to the increased value of the equity assets.
I'd like to convert everything over to index funds or at least do a majority of it.
Why? How does it fit with your plan? Ideally you should only buy and sell to keep your portfolio balanced.
DH thinks this is too risky. ...That [Index Funds] cannot ever be a diversified portfolio,...The goal of our current choices in mutual funds is to have a mixture of small, medium, and large businesses, in a wide variety of sectors.
Diversification is not about stocks or equity mutual funds, it is about the entire portfolio. A market index fund is not the entire portfolio, as even a very diversified fund mix, such as the world fund, still leaves you at the mercy of the equities market.
Diversification requires you to branch out beyond just equities - you should consider other asset classes (bonds, real estate, gold, etc.) to offset volatility in equities. These other assets act as a "brake" on your portfolio, nothing rises or falls too rapidly or too extremely. How much of a mix you have depends on your risk profile.
100% index funds would be too risky a portfolio.
For many (most?) people this is a true statement. It depends on your risk profile. Its worth having the conversation (if you haven't) regarding your "stomach" for adversity. My spouse is extremely risk adverse - she's a "money in the mattress" kind of gal. I am about to the other extreme, a bit of a gambler. We compromise by her having low earning but non-volatile savings accounts and a paid off house, while I get a "stock fund" to play with. Everything else is part of the portfolio plan - for us its stock index funds, bond index funds and real estate.
Also, I think most would agree that a portfolio should be more than just equities, therefore having only one equity index fund is an inadequate portfolio mix.
As an aside, there are now "mixed" funds, usually called 2040, or 2060, or some such, that provide a "mix" of different assets (usually only equities and bonds though, some have a REIT) that approximate a balanced portfolio. They usually have a higher fee but they have the advantage of being "fire and forget" in that they automatically re-balance periodically to get you to a (usually) conservative risk profile by maturity.
Now, you could argue that at our age, we could stand to take more risk. After all, it just means we might have to adjust our retirement age by 5 years in either direction. However, many people would argue that our current portfolio is *already* too risky. After all, traditional advisors recommend you include bonds in your portfolio. At our age, and with our risk tolerance they usually say 10-20% bonds. We have 0%. People also say you should have a chunk of your money in international funds. We only have 10%. By all accounts our current portfolio is much riskier than most professionals would advise. So it doesn’t seem like a good decision to put all our money in US-based index funds, increasing our risk levels and volatility even more.
Risk tolerance (and risk profile) is personal and has nothing to do with age per se. What I think you are getting at is the perception that you could "overcome" bad earnings or negative returns over a long investment time period. While this is generally true for those looking to retire later in life, it really depends on your earning/investment timeline and when you want to retire. Some on here have retired in their 30s.
It seems to me that some people argue for index funds based on reliability. People also argue that index funds have lower fees.
Reliability doesn't seem to be the right word for me. I might choose instead simplicity. Instead of having to choose 50 funds or 2000 individual stocks I can choose 3 or 4 comprehensive funds (each with a different objective) and only worry about balancing these few funds periodically.
Fees are highly vendor dependent. it really pays to shop around, especially when looking at index funds. Most here feel Vanguard has the lowest fees. I have index funds with USAA (retired military), Thrift Savings Fund, and a 401K and they all have different fees but are essentially the same thing - S&P 500 index funds.
It generally holds true though that actively managed funds (funds with a specific "objective" and not following an index) will have higher fees, and will also incur taxes you might not see with an index fund due to higher rates of trading.
You guys are asking the right questions. Congrats on getting this far.