East is East and West is West and the twain SHALL meet!

Indexing and Active Management are two very different investing strategies. With Indexing, an investor relies on the performance of the broad market indices for his returns. With Active Management, he believes that the stock picking ability of his fund manager will beat the returns of the market indices.

Battle lines have been clearly drawn between the two strategies since time immemorial. Bogleheads and Vanguard Diehards will always claim that over the long run, indexing beats active management and others that dont believe in indexing will claim its the other way around.

So who is right and which one should I pick? I look at it this way - well both are right. It is a fact that indexing (specially when it comes to efficient markets like the US) beats active management 70% of the time over the long run. BUT, if I pick the right funds with stud fund managers, I could be in the 30% that beats the index as well.

So why not do a little of both?

Pick index funds for your US allocation since the US is a highly efficient market and it is indeed hard for fund managers to beat the indexes over the long run (70% of them fail to do so). And by long run I mean over 10 years.

For your international allocation, go with actively managed funds since the foreign markets are not as efficient and fund managers have a better chance of beating the indexes (by finding inefficiencies) over the long run.

I personally have my core portfolio in index funds. But I do have some international and mid/small cap funds that are actively managed.