10 Questions: Is Your Fund Family the Enemy?

William Bernstein has a message for fund investors: The interests of mutual fund companies are highly divergent from yours.

Well, Bernstein, a principal in investment-management firm Efficient Frontier Advisors and the proprietor of the Efficient Frontier Web site, doesn't think all mutual fund firms are inherently bad. But plenty of firms, in his opinion, are far more interested in maximizing the fees they collect from you and peddling hot products you might want but certainly don't need. Bernstein takes on suspect fund firms, the so-called market expert's opinion and foolish investment advice in his 2002 book, The Four Pillars of Investing."

Bernstein is an index-fund devotee and a firm believer that proper asset allocation is the key to a happy and wealthy retirement. His opinions may not win the hearts of active-fund adherents, but investors should heed the heaps of great insights about investing contained in his information-packed but readable book. In today's 10 Questions, Bernstein explained his investment philosophy -- why hunting for the next Microsoft MSFT is a fool's game; why today's best-performing funds often end up tomorrow's losers; and why costs matter.

1. In your book, you write that of the Four Pillars -- Theory, History, Psychology and Business -- investors have the most difficulty with Pillars One and Three, Theory and Psychology. What makes these two facets of the market so difficult for investors?

Well, theory is simply not easy. It's basically statistics. Individuals may have an intuitive grasp of addition, subtraction, multiplication and division, but no one is born with an intuitive grasp of statistics. It's very counterintuitive.

Furthermore, as Francis Bacon noted, people have a tendency to see order in patterns where there, in fact, are none. This is true of many investors who look for tried-and-true patterns in the market.

Psychology trips up investors because we're human beings. You're fighting human nature when you invest. Think about how we evolved. We came down from the trees and lived in a world where every minute our very lives where in danger. A good psychological inclination toward fight or flight, the here-and-now moment, was ingrained into us. That's how we respond to risk. That's exactly the wrong way to look at investing. In investing, the short term really doesn't matter. It's the long term that counts, but we're not programmed to think in the long run.