The Case for Index Funds

Even for investors (like me) who believe in judicious use of actively managed funds, broad-based index funds such as the Vanguard Total Stock Market Index fund can be a great choice for the "core and explore" portfolio.

Core-and-explore portfolios use index funds as the core of the investment to get broad market representation and diversification at a low cost. Then, they "explore" by venturing into actively managed funds -- maybe a sector fund or emerging-market fund -- that they hope to use to beat the market.

Like every other investment strategy, it still proves tough to beat the market with core-and-explore -- but it may be cheaper and more successful than going with actively managed funds only. (For more on core-and-explore portfolios, check out this TheStreet.com oldie but goodie.

Get a Life

It's not the 1990s anymore, back when everyone got 25% annual returns no matter what they did. Investing isn't all that fun to most individuals. People don't check their portfolio on Yahoo! every day -- heck, some don't even open up their quarterly statements. Sadly, I have a hunch the markets won't be that much fun over the next decade either.

The point: Index funds offer the easiest way for individuals to have a diversified portfolio that only requires close inspections about once a year for rebalancing purposes. That way, you have more time to do other things.