<prompt> Human: Im currently finalizing my move from a financial advisor to managing my own funds at Vanguard. Before I finished my transfer, I asked him for his perspective on my planned asset allocation 80 stocks 20 bonds in a mix of stockbondREIT index funds. Heres what he had to say about my approach and Vanguard in general. What do you think of his perspective? You had also asked me to comment on your proposed allocation of the funds. In general its fine for what it is, but you may want to consider adding some alternative asset classes into the mix. Unfortunately because I disagree with the concept I cant really get any more specific. Let me explain why. Vanguard and other firms like it stake their existence on the idea that investors andor investment professionals over the long run cannot perform better than market indices, so they should tie their performance to the indices, pay as little as possible, and accept what the indices give. The key to performance, in their philosophy, is to properly allocate within the style box. I feel very strongly that the style box is outdated and has outlived its usefulness. I believe that choosing the proper managers who have a demonstrated track record of adding value to the index whether through the long-term performance of a given fund or their institutional performance prior to establishing a mutual fund is the key to long-term outperformance. Long story short, they say if 75 of managers underperform the index, why bother with active management? I say concentrate on the 25 who do outperform. Being completely tied to an index can lead to very long periods of no or nearly no return, like the SP from April 2000 to February 2013.Note: Im taking my money to Vanguard because I disagree myself.EDIT: I accidentally a word in the title of the post. Oops.  <response>: Broadly speaking, risk can be divided into two categories. Systematic risk is the risk thats associated with certain types of investments. Unsystematic risk is the risk thats associated with individual investments.For example, suppose that you own a rental property. Systematic risk includes the risk that the national housing market will collapse. Unsystematic risk includes the risk that youll have a terrible tenant who does everything short of set your place on fire.In general, the answer to unsystematic risk is diversification. Thats why index funds are great; if you own every asset in a class, you cant possibly be more diversified.Active management exposes you to two kinds of unsystematic risk. The first is the risk that the individual investments that your fund manager selects will perform worse than other securities in the same asset class. The second is the risk that you will choose a bad fund manager.Systematic risk is generally associated with higher potential rewards. Yields on junk bonds are higher than yields on treasuries, for example. Unsystematic risk does not have such a correlation. Therefore, all things equal, I believe it is always better to minimize unsystematic risk, and to choose a level of systematic risk and thus potential reward that you are comfortable with.Most people intuitively understand that unsystematic risk is essentially a tax on poor decision-making. Unfortunately, many people believe that they can avoid unsystematic risk by making intelligent decisions. There are two problems with this line of thinking. The first is that making intelligent decisions with respect to individual financial assets is really, really hard. Youre competing with highly-trained and highly-paid professionals, and even they get it wrong most of the time.The second is that decisions are expensive. The more decisions that you need to make or that you pay someone to make regarding your investments, the more that you pay, both in terms of financial cost e.g. expense ratios, transaction fees, taxes, etc. and opportunity cost e.g. market timing. So active management strategies need to deliver a return thats significantly better than the market, simply to break even with respect to these costs.Theres one thing that active management does consistently deliver, however: income for the fund manager and salespeople. 