Mutual Fund Talk

Beating The Market Is Easy (and Here Is How)

Settling for the average by index investing is ok, but one can surely do better. Tim Middleton at MSN Money offers some time-tested mutual fund recommendations.

It's a simple misunderstanding but one with profound implications for your personal fortune, and fortunes. "The market," as represented by the 500, isn't the market at all. It's the equivalent of an average domestic mutual fund that invests in large companies.

With the 500 down 0.51% as of Feb. 28, as represented by Bogle's flagship fund, Vanguard 500 Index (VFINX), you would have to work hard to do worse. And this isn't a fluke, although the breadth and depth of defeat is particularly stark right now.

If you've been tricked into thinking an S&P 500 index fund is a one-stop solution to your portfolio planning, it's understandable. Thanks to relentless promotion from Standard & Poor's and Vanguard, the 500, in the minds of investors, "represents the market," says Don Phillips, managing director of Morningstar. "It says, 'This is what stocks are doing.' "

The real market, however, has lifted the 500's skirt to reveal some pretty spindly legs. An easy-to-beat index isn't just S&P's problem, either. Phillips notes that Morgan Stanley Capital International's EAFE foreign-stock index was trounced throughout the 1990s by active managers, who simply avoided Japan, which represented as much as a third of that benchmark's weight.

If your life's goal is a gentleman's C, indexing was invented for you. But if you think you're as smart as Lisa Simpson, who gets A's, you'll find it takes very little homework to earn them.