The S&P 500 Is a Mutual Fund -- and a Bad One at That

One myth that appears to be imploding along with the market is the notion that investors should "passively" buy the market via the S&P 500 index rather than buying individual stocks.

It's not just that the S&P 500 is down a bunch this year or last. It's that the index has done so poorly relative to other key benchmarks for reasons that look suspiciously like pilot error: The index is down 34% since the start of 2000 through June 25, 2002, more than 50% worse than the decline of its archrival, the Dow Jones Industrial Average, largely because of a series of reckless decisions to add high-momentum technology stocks in that pivotal year.

Of the 45 stocks that Standard & Poor's added to its benchmark index in 2000 that remain in the index, 22 are down more than 50%. Thirteen of those are down more than 75%, and eight are down more than 85%. ...