Author Topic: At 28 yo, Passive versus Active, or mix of both?  (Read 9375 times)

$$Nystagmus$$

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At 28 yo, Passive versus Active, or mix of both?
« on: October 25, 2014, 10:15:45 AM »
Hello

First post here. Very impressed with the great wealth of knowledge I have found on this forum.  Relatively new to the investment game, and would love some advice.

At this point, I have both a Simple IRA and Roth IRA set up that I have been feeding money into for the past year.  Both are AmericanFund mutual funds, following the AmericanFund 2050 Retirement plan.  I do not max out on these, but I do take full advantage of the 3% match from my employer, which goes into the Simple, and put about $250/month in the Roth.  I work with a financial planner who recommended the funds.

I only started learning about Vanguard and Indexes about 3 months ago.  Didn't take any financial courses through college, and parents didn't have much knowledge in finances themselves. 

My thoughts are to keep the two IRA's with AmericanFunds, but also purchase the Vanguard Total Market Stock Index, and start a Roth or Traditional IRA with that. 

When I asked my financial adviser, he said the Vanguard versus our AmericanFund is very similar in terms of diversification.  I pushed a little more, and he said that when the market does poorly, often active funds do better, but if the market is doing well, indexes often out perform, save for those few active managers who actually beat the market.

What are your thoughts on having both an active funds as well as passive?

Thanks for your time


aschmidt2930

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #1 on: October 25, 2014, 10:25:54 AM »
One big factor is the fees you're paying on the AmericanFunds mutual funds.  What's the expense ratio?  If it's your typical actively managed fund, then you're likely best off rolling it over to Vanguard, as it will grow much more in the long-term with smaller fees being taken from it. 

GGNoob

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #2 on: October 25, 2014, 10:31:34 AM »
Sorry I don't have any links right now, but research shows that index funds outperform active funds about 80% of the time.


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$$Nystagmus$$

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #3 on: October 25, 2014, 10:35:52 AM »
Thanks for the replies


aschmidt2930 - I don't have it in front of me right now, but I think the expense ratio is 0.70%.  I know Vanguard is like 0.05% of something like that.  Again, the argument from my advisor (and I release he is biased as he will make nothing if I go to Vanguard), is the again, if the market performs poorly, AKA right now, then active funds often do better.

matchewed

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #4 on: October 25, 2014, 10:41:36 AM »
Thanks for the replies


aschmidt2930 - I don't have it in front of me right now, but I think the expense ratio is 0.70%.  I know Vanguard is like 0.05% of something like that.  Again, the argument from my advisor (and I release he is biased as he will make nothing if I go to Vanguard), is the again, if the market performs poorly, AKA right now, then active funds often do better.

Empty claims are empty. Still probably better to go w/ a passive approach.
https://personal.vanguard.com/pdf/icribm.pdf

hodedofome

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #5 on: October 25, 2014, 01:14:58 PM »
I am an active trader but I would never recommend someone else go with an active fund unless they understood exactly how it could make more money than an index. Most funds don't and can't outperform simply because of the higher fees. If you want the best chance to make the most money over time, lowering your costs is vital.

GlassStash

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #6 on: October 25, 2014, 08:00:36 PM »

Again, the argument from my advisor (and I release he is biased as he will make nothing if I go to Vanguard), is the again, if the market performs poorly, AKA right now, then active funds often do better.

This simply isn't true. I challenge your "advisor" to provide data to support this statement. Countless studies have shown only 1 out of every 5 actively managed funds beat out index funds.

If the market performs poorly, so do most portfolios. The inverse is also true.

Markets go up and down, but fees are forever. I would stick to low fee index funds consisting of an AA you're comfortable with.

GlassStash

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #7 on: October 25, 2014, 08:01:34 PM »

Again, the argument from my advisor (and I release he is biased as he will make nothing if I go to Vanguard), is the again, if the market performs poorly, AKA right now, then active funds often do better.

This simply isn't true. I challenge your "advisor" to provide data to support this statement. Countless studies have shown only 1 out of every 5 actively managed funds beat out index funds.

If the market performs poorly, so do most portfolios. The inverse is also true.

Markets go up and down, but fees are forever. I would stick to low fee index funds consisting of an AA you're comfortable with.

usmarine1975

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #8 on: October 25, 2014, 08:13:01 PM »
I'll stick my neck out to get bitten simply to present a different view. Lower fee only matters if the funds perform the same. Funds do exist that beat Vanguard even when you consider the low fees. Most of the studies I have seen pushing low fees are studies by vanguard and other such entities.  That being said American Funds is not one to my knowledge that beats Vanguard.

If the return is shitty the low fee doesn't matter.  The fee alone should not be your only point of reference.

OK Vanguard lovers face punch away.

Disclosure:  I work for a fee based advisor firm. We charge a fee based on aum. We take no commission from any fund we use. And no because of my job I can not provide you with the funds that beat vanguards even when considering the fee.

I will also add that I have added a Vanguard fund to my portfolio but I looked at more then just the fee and again I can not tell you which one.

Good luck.
« Last Edit: October 25, 2014, 08:15:43 PM by usmarine1975 »

GlassStash

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #9 on: October 25, 2014, 08:18:07 PM »

I'll stick my neck out to get bitten simply to present a different view. Lower fee only matters if the funds perform the same. Funds do exist that beat Vanguard even when you consider the low fees. Most of the studies I have seen pushing low fees are studies by vanguard and other such entities.  That being said American Funds is not one to my knowledge that beats Vanguard.

If the return is shitty the low fee doesn't matter.  The fee alone should not be your only point of reference.

OK Vanguard lovers face punch away.

Disclosure:  I work for a fee based advisor firm. We charge a fee based on aum. We take no commission from any fund we use. And no because of my job I can not provide you with the funds that beat vanguards even when considering the fee.

No biting, just debating ;-).

I think the point of noting fees is that they are the only real constant in investing. There are undoubtedly funds that out perform vanguard. But, past performance does not guarantee future returns. If someone could guarantee a similar fund would provide me more of a return than my vanguard fund, I would switch. Shockingly, no one is willing to make that guarantee....

usmarine1975

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #10 on: October 25, 2014, 08:21:26 PM »
There's no guarantee your Vanguard fund will outperform its fee. Investing never has a guarantee.  The fee is constant but again only one piece of the puzzle.

GlassStash

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #11 on: October 25, 2014, 08:29:29 PM »

There's no guarantee your Vanguard fund will outperform its fee. Investing never has a guarantee.  The fee is constant but again only one piece of the puzzle.

Fees are guaranteed. The higher the fee, the more drag on the return. Choosing an actively managed fund guarantees a higher drag on returns, a higher hurdle for the fund to overcome. I'd rather use broad based index funds and make that hurdle as small as possible than have to sift through all the salesmen b.s. to try to find one of the few actively managed funds that can out-perform my index funds.

usmarine1975

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #12 on: October 25, 2014, 08:34:48 PM »
Of the funds I have sifted through roughly 50% had a 10 to 15 year track record of beating Vanguard even when factoring the fee.  Granted I have not sifted through even a 1/4 of all the funds that exist. And for many your approach may be the best. 

GlassStash

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #13 on: October 25, 2014, 08:41:34 PM »

Of the funds I have sifted through roughly 50% had a 10 to 15 year track record of beating Vanguard even when factoring the fee.  Granted I have not sifted through even a 1/4 of all the funds that exist. And for many your approach may be the best.

I think we both agree that there are funds that outperform Vanguard funds, or low-fee index funds. I'm just not a fan of paying higher fees so other people can actively manage my investments without being accountable if they're wrong. If they were willing to at least be fiduciaries, I may be more open to paying for their services/heeding their advice.

dungoofed

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #14 on: October 25, 2014, 10:39:31 PM »
Hi $$Nystagmus$$ welcome to the forum, and thanks for the thought-provoking first question.

So assuming your adviser could pick an active fund that 1) performs worse when the market is doing well, and 2) performs better when the market is doing poorly. My questions for you would be:

1) What are you trying to achieve here? Diversification or a hedge against a poorly-performing market? There are other options available to you if that is the case (bonds, gold, etc).

2) Regarding "when the market does poorly, often active funds do better (than index funds)", what exactly is "poorly" and what exactly is "better"? I understand that there will be no definite answers here, but are we talking about active funds making more in a flat market? In a tanking market? In a volatile market? Are we talking the difference between losing 20% of it's value in a day vs losing 18% for active funds?

3) Does it even matter how well your portfolio is doing in the short term? You're 28, it's not like the bottom is going to fall out of the market the day before you're about to retire any time soon and you're going to be "phew! Lucky I had some actively managed funds in there!"

hodedofome

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At 28 yo, Passive versus Active, or mix of both?
« Reply #15 on: October 26, 2014, 12:10:13 PM »
There are strategies, like value, momentum and quality, that have shown to outperform over the long term. However, finding a fund that follows this, and has a portfolio that is concentrated enough to take advantage of it, and actually charges a low enough fee to make it worth it, is very tough. Most funds want to only deal with large caps, and they hold hundreds or even thousands of stocks, when perhaps only 100 are worth holding in the first place. They probably do this for liquidity issues, but that doesn't mean you have to be the one that suffers their size.

I know people that can pick great managers, but that's because they know enough to do the strategy themselves, and just don't want to.

If your strategy is just to pick the top performing funds of the last 10 years, without knowing why they outperformed, then you're just betting on luck. That's a crappy strategy.
« Last Edit: October 26, 2014, 12:12:24 PM by hodedofome »

waltworks

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #16 on: October 26, 2014, 12:51:51 PM »
This is classic survivor bias, assuming you are just looking at funds that are active now. Many, many managed funds that existed 10-15 years ago no longer do (especially since that time period encompasses 2 big crashes). AFAIK there is really no controversy about the fact that most managed funds lose to indexing over medium to long time periods. The debate is really about whether funds that *will* outperform can be identified beforehand or whether they are mostly the products of chance.

If only I were 28... VTSAX all the way. Kick your advisor to the curb, max out everything, and check back in in 10 years.

Edit: found a hard number (here: http://www.huffingtonpost.com/dan-solin/facts-your-dont-know-abou_b_5552468.html) for 2003-2013 - only about 50% of mutual funds that existed in 2003 were still around in 2013. Ouch.

Here's a good Vanguard article on the topic: https://personal.vanguard.com/pdf/s362.pdf

-W

Of the funds I have sifted through roughly 50% had a 10 to 15 year track record of beating Vanguard even when factoring the fee.  Granted I have not sifted through even a 1/4 of all the funds that exist. And for many your approach may be the best.
« Last Edit: October 26, 2014, 05:38:58 PM by waltworks »

NP

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #17 on: October 26, 2014, 02:03:18 PM »
I know people that can pick great managers, but that's because they know enough to do the strategy themselves, and just don't want to.

That's a key insight there. As a newbie your chances of identifying the right funds are very slim. And your chances of identifying the financial advisors you can trust and who could pick those funds are just as slim.

Broad index investing is a safe default. Until you can evaluate these things on your own to some degree, you're taking a big risk if you do anything else.

surfhb

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #18 on: October 26, 2014, 08:52:20 PM »
Of the funds I have sifted through roughly 50% had a 10 to 15 year track record of beating Vanguard even when factoring the fee.  Granted I have not sifted through even a 1/4 of all the funds that exist. And for many your approach may be the best.

10-15 years is hardly a good benchmark to track the performance of a fund and if it has out preformed the street.    Try 30+   No one invest for 15 then just stops.   

I have no need to guess which fund might beat the indexes in the future.....that's the beauty of passive investing.    Your managed fund just might beat my Total Stock Market.....who knows?  When it comes to investing I find it best to reduce as many  "who knows" situations as possible :)

OP:  Read "Random Walk Down Wall St"
« Last Edit: October 26, 2014, 09:19:06 PM by surfhb »

usmarine1975

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #19 on: October 27, 2014, 02:58:56 AM »
10 to 15 years was the average and a guesstimate. Some of them were started less than 2 years ago.  I agree a 30 year look back is better then a 10 or 15.  But some funds do not have that.  My point is mainly that the fee should not be your only factor.  The articles posted 2 or 3 above read like any sales literature and are not in biased studies.  Vanguard studies are biased.  Not saying you can't glean some good info from them but caution should be the word of the day.  I like Warren Buffets thoughts that you should only invest in what you understand. 

Read as much as you can, research, research and don't just follow the crowd or an advisor.  Educate yourself.  Many great points have been mentioned on this thread.  Take that info Op and expand your horizon by reading and studying  more.  And most importantly enjoy life.

matchewed

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #20 on: October 27, 2014, 05:40:14 AM »
It is interesting how the word bias is just thrown out there with little discussed about bias itself. Does Vanguard have a bias? Yes, as well they should, it is in their interest for them to promote index funds. Is the paper talking about how when you analyze mutual fund performance you should also include those that have failed within the time frame you define biased? I'd say no because it is actually reversing a bias in the original question about analyzing mutual fund performance over a time frame.

But if you spot the bias in the paper please feel free to point it out. I could very well be wrong and missing it.

And from an earlier point, while I agree that fees should not be the only analysis the paper I linked to earlier pointed out that mutual fund performance in bear markets generally don't exceed market benchmarks. So why invest in them given the OP's initial claim that they are superior in bear markets is a false claim? If fees and performance are biting into your profit and most people can't pick the winners/pick the people who can pick the winners then mutual funds are good for what exactly?

waltworks

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #21 on: October 27, 2014, 09:45:57 AM »
If Vanguard wants to make their .05% off me, the rat finks, I guess I'll have to let them. They do pull the strings, after all. It's a revolving door between Vanguard and the gov't these days.

-W

surfhb

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #22 on: October 27, 2014, 10:18:05 AM »
The laws of math are unbiased.   That's the only reason I choose to be a passive investor :)

GlassStash

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #23 on: October 27, 2014, 10:32:41 AM »

The laws of math are unbiased.   That's the only reason I choose to be a passive investor :)

+1 for math

$$Nystagmus$$

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #24 on: October 27, 2014, 12:56:57 PM »
Thanks everyone for the posts.  Glad I was able to get a little discussion going.

I appreciate everyone taking the time to share their thoughts.

Dungoofed-

1) - Goal is long term investment.  30+ years.  I understand that bonds are arguably safer bests, but low ROI.

2) I guess what I was going for here was that in a "poor" market, say 2008 for example, that I was told an active managed fund may perform "better" which could be about 2-3% max greater then passive.

3. Once again, not short term.  But I will admit that the main purpose of the post was regarding your comment, "Phew, glad I at least had some active management going on..." Just in case others thought it was a good idea to do passive and active together.  That does not seem to be the case after reading responses however.


$$Nystagmus$$

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #25 on: October 27, 2014, 12:58:23 PM »
This is classic survivor bias, assuming you are just looking at funds that are active now. Many, many managed funds that existed 10-15 years ago no longer do (especially since that time period encompasses 2 big crashes). AFAIK there is really no controversy about the fact that most managed funds lose to indexing over medium to long time periods. The debate is really about whether funds that *will* outperform can be identified beforehand or whether they are mostly the products of chance.

If only I were 28... VTSAX all the way. Kick your advisor to the curb, max out everything, and check back in in 10 years.

Edit: found a hard number (here: http://www.huffingtonpost.com/dan-solin/facts-your-dont-know-abou_b_5552468.html) for 2003-2013 - only about 50% of mutual funds that existed in 2003 were still around in 2013. Ouch.

Here's a good Vanguard article on the topic: https://personal.vanguard.com/pdf/s362.pdf

-W

Of the funds I have sifted through roughly 50% had a 10 to 15 year track record of beating Vanguard even when factoring the fee.  Granted I have not sifted through even a 1/4 of all the funds that exist. And for many your approach may be the best.

Thanks WaltWorks.  No able to afford the initial investment into the Admiral fund (I believe this is $10,000 initial investment), but looking at Vanguard Total Stock Index.  thanks again for the advice

$$Nystagmus$$

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #26 on: October 27, 2014, 12:59:39 PM »

Again, the argument from my advisor (and I release he is biased as he will make nothing if I go to Vanguard), is the again, if the market performs poorly, AKA right now, then active funds often do better.

This simply isn't true. I challenge your "advisor" to provide data to support this statement. Countless studies have shown only 1 out of every 5 actively managed funds beat out index funds.

If the market performs poorly, so do most portfolios. The inverse is also true.

Markets go up and down, but fees are forever. I would stick to low fee index funds consisting of an AA you're comfortable with.

Thanks GlassStash.

I think my adviser is claiming to be one of those "1 out of 5" that can beat the market :) 

$$Nystagmus$$

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #27 on: October 27, 2014, 01:01:41 PM »
I am an active trader but I would never recommend someone else go with an active fund unless they understood exactly how it could make more money than an index. Most funds don't and can't outperform simply because of the higher fees. If you want the best chance to make the most money over time, lowering your costs is vital.

Great advice.  I personally feel that I don't have the time and energy that some may have to understand well enough, or feel comfortable enough doing active trading on my own.  Great to know that passive index funds exist.  Of course, no adviser I've worked with ever mentioned them before. No money in it for them, so no reason to recommend (my thoughts anyway)

waltworks

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #28 on: October 27, 2014, 01:16:41 PM »
Once you hit the $10k in VTSMX (no matter how long it takes you) you can convert for free to the Admiral shares. Just FYI.

_W

Thanks WaltWorks.  No able to afford the initial investment into the Admiral fund (I believe this is $10,000 initial investment), but looking at Vanguard Total Stock Index.  thanks again for the advice

usmarine1975

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #29 on: October 27, 2014, 01:22:22 PM »
I will end with this.  Do your research and know how an index fund works, the advantages, disadvantages etc... Then research Mutual Funds, and buying stocks outright and how they work as well.  The Suggested reading forum on here may have some great book recommendations.  Once you have done the necessary research invest away.  (I would invest whatever you have now in what you are comfortable investing in.  But do the research and ensure it's where you want to be.  No one on this forum is going to be accountable if your investments do not perform the way you think they should.  Your Advisor could be held accountable especially if he is a fiduciary advisor.  Do some research on that as well.  Find out how your advisor get's paid.  If he isn't willing to tell you I would find someone who is.

The more information you gather can only help you in the long run, because the reality is it doesn't affect me if you make or lose money.  Nor does it affect anyone else on this forum.  It affects you and nobody cares about your money like you do.  Take it for what it's worth but do some research.  You have started at a good age like someone else said if only I could go back.

TomTX

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #30 on: October 27, 2014, 02:46:45 PM »

1) - Goal is long term investment.  30+ years.  I understand that bonds are arguably safer bests, but low ROI.
For a 30+ year time frame,  stocks are likely less risky than bonds. The longer the time frame,  the more inflation risk you have with bonds. Buy 30 year Treasuries and you are locked in at a 3% return for 30 years. What if we have 5%, 10%, 15% inflation for a decade? Reprise the 1970s.

In a 30 year timeframe, that 0.7% expenses ends up costing you nearly 20% when compared to 0.05% expenses

GlassStash

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #31 on: October 27, 2014, 02:53:28 PM »


Again, the argument from my advisor (and I release he is biased as he will make nothing if I go to Vanguard), is the again, if the market performs poorly, AKA right now, then active funds often do better.

This simply isn't true. I challenge your "advisor" to provide data to support this statement. Countless studies have shown only 1 out of every 5 actively managed funds beat out index funds.

If the market performs poorly, so do most portfolios. The inverse is also true.

Markets go up and down, but fees are forever. I would stick to low fee index funds consisting of an AA you're comfortable with.

Thanks GlassStash.

I think my adviser is claiming to be one of those "1 out of 5" that can beat the market :)

Imagine that ha!

GlassStash

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #32 on: October 27, 2014, 03:06:10 PM »

No one on this forum is going to be accountable if your investments do not perform the way you think they should.  Your Advisor could be held accountable especially if he is a fiduciary advisor.  Do some research on that as well.  Find out how your advisor get's paid.  If he isn't willing to tell you I would find someone who is.

So much this. Take free advice with a major grain of salt, but be especially weary of advice given by someone with a financial interest in that advice.

dungoofed

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Re: At 28 yo, Passive versus Active, or mix of both?
« Reply #33 on: October 27, 2014, 06:45:56 PM »
$$Nystagmus$$ - Sounds like you're on your way!

And thanks for coming back and nurturing the thread a bit. I was worried for a moment that you might just disappear! But then I realised that not everyone logs in multiple times every day like some of us here lol