The Case for Index Funds

The surest advice an investing Web site can give the majority of its readers can be reduced to three words: Buy index funds.

Of course, that's not entirely practical in a world where most people shoot to beat the market (it also leaves a lot of room on the page). But even that sound advice has come under fire recently, as the most popular index fund, the (VFINX)Vanguard 500, which uses the S&P 500 as its benchmark, has lost 38.59% since March 30, 2000.

Today's column offers several reasons why investors are well-served using index funds in their portfolios. But I should start with a clarification: Indexing is not the S&P 500 alone.

"We're constantly being asked questions presupposing that the S&P 500 and indexing are synonymous," said Will McClatchy, co-founder of Indexfunds.com and author of Index Funds: Strategies for Investing Success. "It's astounding that so many people make this mistake; indexing is using a low-cost, benchmark-pegged approach to investing in a variety of asset classes."

Better Than Average

In Lake Wobegon, all the children are above average. Lake Wobegon, of course, is a fictitious place -- and so is a stock market in which many, let alone all, can be above average.