Index Funds
Anyway, the long and the short of it is that the index outperforms 85 percent of actively managed mutual funds. This is an argument for buying a dartboard portfolio or, if you don't like the volatility, an index fund. One of the first companies to offer these funds was Vanguard. I have been a Vanguard customer for many years and can't think of anything they could have done better.
Besides getting a higher average return, there are many other good reasons to invest your money in index funds. The first is psychological. When I had individual stocks, every time a stock went up, I attributed it to luck. Every time a stock went down, I attributed it to idiocy on my part. I felt dumber and dumber with every passing year because I ignored the stocks that went up and focussed on the ones that dived. Some Wall Street types have the opposite psychology: they only remember their winners and hence come to think of themselves as Einsteins after five years. Whatever your psychology, there is a certain inner peace to be achieved by forgetting about your money.
Another reason to index is to free up time to make more money. In every office there is at least one sorry loser checking the market every ten minutes, going home at night to read financial reports, running charts, and buying software to manage his complex portfolio. If he were a managing a $10 billion mutual fund, perhaps this effort would be worth it. But to try to beat the index by 2% with a portfolio of $50,000? That's $1,000 extra/year. Even assuming that he can get that extra 2%, he would have earned far more per hour working the night shift at the local 7-Eleven. Your time is valuable. If you really must be greedy, then be greedy and smart and take a consulting job. Or enjoy the extra time with your friends and family. Don't waste it trying to beat the market.
I have oversimplified things a bit here. For example, even if you believe the Efficient Market Hypothesis, there are stocks that are inherently more volatile than others. E.g., a high-tech company will go up more in a market boom and go down more in market bust than will a utility. In some sense, both are "worth their price" but one or the other might be a better buy for you because of your level of risk aversion. If you really want to understand this stuff at a deep level, read A Random Walk Down Wall Street and then Principles of Corporate Finance by Brealey and Myers. The latter book is the textbook used in many advanced finance course taken by MBAs. An MBA student will spend the entire term going through the book and doing problems, but if you have a standard MIT freshman math and science background, you can read the whole thing in a night or two.
If I haven't convinced you to stay away from Wall Street esoterica, here are a few things I've learned through bitter personal experience and/or reading the above books...
