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Index funds

History suggests that, in the long run, only one of every five actively managed funds is apt to outpace the market index (after taxes, only one of seven). And some simple commonsense principles should help you to select them and to earn a generous portion of the market's return - again, all too likely, less than 100 percent. If there are long odds against outpacing the market, going about the task of fund selection intelligently can at least help to guard against a significant failure. Even master investor Warren Buffett, a strong proponent of the index approach, concedes that there may be other ways to construct an investment portfolio:

"Should you choose... to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note the word 'selected': You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital."

The Prussian General Karl von Clausewitz once said, "The greatest enemy of a good plan is the dream of a perfect plan." And, though I believe that an index strategy is a good strategy, you may want to seek a better plan, if not a perfect plan, no matter how great the challenge, no matter how overpowering the odds against implementing it with extraordinary success. So, much as I would urge you to commit your investments to an all-index-fund approach - or at least to follow an approach using index funds as the core of your portfolio.