Active versus passive

Q: What’s an “actively managed” mutual fund?

B.G., Rockville, Md. A: There are two strategies for managing a mutual fund: active and passive management. An actively managed fund is run by financial professionals who study and select various investments for the fund. A passively managed fund, in contrast, needs little management: It simply tries to mirror an index (or a specific part of the market), aiming to hold the same securities and deliver roughly the same return, before fees. An S&P 500 index fund, for example, will typically hold the 500 stocks in that index.

Most actively managed stock funds actually underperform the benchmarks they’re trying to beat. That’s partly because index funds are far less costly to operate and also tend to charge much lower fees. It’s generally a good move to have some, or much, of your long-term money in index funds.

Research funds at Morningstar.com, and learn more at Fool.com/how-to-invest.

Q: Is it a smart strategy to buy stocks when they’re near their 52-week lows and sell them when they’re near their highs?

L.T., Clayton, Mo.

A: Panning for gold among stocks that have fallen sharply can be rewarding, as great companies’ stocks can occasionally be punished due to various temporary issues or because the overall market drops. Just research them enough to make sure there are no lasting problems.

Think twice about selling a stock near its high, though. There’s a good chance the company is performing well, and it might still have a lot of growth ahead; you don’t want to miss out on future gains. It’s best not to focus too much on highs and lows — just compare a stock’s current price to where you expect it to go.