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NEW YORK (CNN/Money) - I have some actively managed mutual funds that have been performing poorly and I want to sell them and move into index funds. Given current market and political conditions, is it better to do make this move now or wait until later?

-- Tammy Lee, Pacifica, Calif.

Let me start by saying that I wholeheartedly back your decision to go into index funds. I wouldn't go so far as to say that everyone has to have all his or her money in index funds (I don't). But I think these funds make excellent core holdings for most investors.

Why? The first reason is low cost. The typical domestic stock mutual fund has annual operating costs -- or, in fund lingo, an expense ratio -- equal to about 1.5 percent of assets. Which means that if the typical fund earns 10 percent before expenses, investors get to keep only 85 percent of that return, or 8.5 percent.

Although expenses on index funds will vary depending on which fund company offers the fund and which index, or benchmark, the fund is tracking, you can easily find index funds that charge 0.20 percent of assets or less.

That means an index fund essentially has a built-in lead over an actively managed fund. Or, to put it another way, the manager of an actively managed fund has to earn a significantly higher return before expenses just to match the index fund. Is that possible? Sure, some fund managers manage it. But few manage it consistently over the long term, and it's hard to say in advance who those managers will be.

Suffice it to say that over long periods of time -- 10 to 20 years or more -- index funds will usually outperform actively managed funds that invest in similar securities. For details on the historical performance of index vs. actively managed funds, I suggest you download a copy of Index funds: The 12-Step Program.

The second reason I think investors should consider index funds is that you know what you're getting.

An active manager who runs a large-company stock fund may venture into mid-cap stocks or small-cap stocks to juice returns. That move may or may not work, but either way it means you're not getting what you came to the manager for: large-company stocks.

With index funds, you don't have to worry about "style drift" -- i.e., managers changing their investing strategy whether intentionally or not. If you buy an index fund that mirrors an index of large-company stocks, such as the Standard & Poor's 500, or a fund that tracks a small-cap index like the Russell 2000, you know you're getting large caps or small caps.

That said, however, index funds do not assure that you will make money. All they will do is track the particular index they're designed to track. So if you buy an index fund pegged to the S&P 500 and the S&P 500 index swoons, your index fund will swoon right along with it. Because that's what it's designed to do -- mindlessly track the index.

That's fine with me, though, because despite short-term setbacks, stocks climb in value over the long-term. And it's that upward trajectory over the longer term that you're buying into with an index fund. Just don't get the idea that buying an index fund is going to somehow protect you from the market's ups and downs. It won't.

Which brings us to your question of whether now would be a good time to make your move into index funds.

If by that you mean, "Would switching now be a good 'tactical' move that gets you into index funds just before they go up in value and your actively managed funds go down in value," my answer is, "I haven't got a clue." Neither I nor anyone else has the inside track on what the market is likely to do over the next few months or which funds are going to outperform.

But I don't think smart investors should think tactically. I believe they should think strategically -- that is, make decisions based on what has the best chance of increasing their wealth over the long term. And on that basis, I think now is as good a time as any to make the move into index funds.

By acting now you may also be able to shave your 2004 tax bill by deducting losses from the sale of your active funds, assuming you have losses, against any capital gains you may have or even against ordinary income. I'm not suggesting that tax considerations should be the reason to make your move, only that tax savings could be an extra benefit. For details on how to deduct securities losses, check out IRS Publication 550: Investment Income and Expenses (Including Capital Gains and Losses) at the IRS Web site.

Two final notes before you make your move. First, investing in an index fund doesn't guarantee your portfolio will be diversified. If you buy only a large-cap index fund pegged to the S&P 500, you won't have exposure to small-cap stocks, or bonds for that matter.

So you want to be sure that you either buy an index that tracks the entire U.S. stock market-that is, one that follows a very broad index like the Wilshire 5000-or you want to buy several index funds that, combined, give you exposure to all sectors of the market. And you don't want to forget about bonds.

Second, the main goal of index funds is to track the benchmark the fund is designed to replicate. The higher an index fund's fees, the more its returns are likely to lag those of the index it's supposed to mirror.

So when you do switch, opt for index funds with razor-thin operating expenses. That way more of the fund's gains will go into your pocket rather than the fund company's.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."