Remember all those promises fund managers made during the late 1990s about how they'd really be able to shine when the market got ugly?

Stock pickers who failed to beat broad-market indexes like the

S&P 500

and the Wilshire 5000 during the bull market's boom insisted that they'd eventually have their day in the sun. The argument: They'd be able to sidestep disastrous stocks that index funds would be forced to buy, and also ratchet up their cash positions to provide some extra cushion.

As it turns out, many fund managers are still struggling and failing to beat these benchmark indexes.

Looking at the 12 months ending June 30, the Wilshire 5000 index, which is designed to track the entire U.S. stock market, outperformed 55% of U.S. diversified stock funds. The S&P, which is more of a large-cap index, beat 49% of those funds -- almost half. Looking at only large-cap mutual funds, the S&P held up much better, outpacing 67% of large-stock funds.

Of course, the actual performance of these indices is nothing to get excited about. Over that one-year period, the Wilshire 5000 fell 18%. The S&P 500 was down 19%.

Owning an index fund that tracks one of these indices has been undoubtedly painful. Index funds such as

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Vanguard's Total Stock Market fund and its

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500 Index fund have been no place to hide from the turmoil.

At the same time, plenty of people suffered even more in funds run by actual stock pickers, because fund managers' promises to do better in a rough market haven't panned out. Unfortunately, the fund managers will always have two things working against them: a lack of real talent and higher fees.

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"The notion of market timing is very difficult," says Andrew Lo, a professor at MIT and director of the Laboratory of Financial Engineering. "The market is very unpredictable. It's like trying to do long-range weather forecasting."

It's easy to

say

that you'll move to cash when the market gets rough and avoid disastrous stocks. But actually doing that is much harder. How the average fund manager measures up against the indices over the past year is proof of that. But there are also plenty of specific examples.

Take Jim McCall. Merrill Lynch went to great lengths to hire this guy from PBHG. In March 2000, Merrill launched its

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Focus Twenty fund, with McCall at the helm. He concentrated the fund in tech stocks, because that was what was working at the time. But when those stocks tanked, he couldn't get out of the way. The fund fell 70% last year, making it one of the worst large-cap growth funds in the nation. McCall left the firm in November.

Not every manager is as terrible as McCall. Far from it. Some managers have very good years and never cause their funds to blow up. Tom Marsico, who ran the

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Janus Twenty fund for almost 10 years, was able to adapt his growth style to fit what was happening in the market. On his

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Marsico Focus fund, he moved out of tech stocks and into more conservative picks. That fund is down this year -- off 10.2% in 2002 -- but that's better than 98% of other large-cap growth funds. Smart move.

Nevertheless, it's still terribly difficult to consistently outperform an index year after year.

Some folks can do it. On the

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Legg Mason Value fund, Bill Miller has beaten the S&P 500 for 10 years in a row. But consistency like that is hard to find.

One of the biggest obstacles: high fees. Even if a manager can somehow beat the market every year, that stock picker is going to charge you more money than an index fund. A manager has to produce truly exceptional performance to beat the market after the fees and trading costs (such as commissions) are deducted. The average expense ratio on a U.S. stock fund is 1.47%. Meanwhile, you'll pay just 0.2% every year to own the Vanguard Total Stock Market fund.

If you take into account expenses and trading costs, an index fund has a performance advantage of about 2 percentage points a year. It's already hard for a stock picker to beat the market. But to outperform by more than 2 percentage points a year is even more rare.

To be sure, the indices don't hold up as well if you look at three-year performance. The Wilshire and the S&P only beat about one-third of diversified U.S. stock funds. But looking at their 10-year performance, these market benchmarks still outperform a majority of funds run by stock pickers.

So there's still nothing wrong with putting some money in a broad index fund.

But nowadays, a more vital question is whether to invest in the market at all.

In keeping with TSC's editorial policy, Dagen McDowell doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Dagen welcomes your questions and comments, and invites you to send them to

Dagen McDowell.