Anything labelled an "index fund" is not necessarily a good investment.
You have to know what underlying benchmark is, what expense ratio is, and how long-term shareholder friendly that particular money manager is if you hold the index fund in a taxable account.
Low cost, broad market index fund (S & P 500 was originally recommended by John Bogle, but he now recommends a Total U. S. Stock Market index fund (more diversification, and less portfolio turnover translating into slightly lower hidden trading costs and capital gains payouts costs over time) is specifically what is cornerstone of Bogle buy and hold for the long-term strategy of
wealth creation through compound interest.
Plus, a total market index fund (
VTSMX) is typically over 99% stocks (many actively managed funds have 5 - 10% cash on hand to cover redemptions and opportunistic buying), which will drag down returns over time (stocks >> bonds > cash over very long periods of time; IIRC, strategic asset allocation can explain something like 92% of returns over very extended periods of time).
No scientific study to back up this assertion, but I don't think you can really appreciate the power of low cost, broad-market index fund (particularly in taxable account because of continued taxation on reinvested capital gains and dividends) till you actually hold that particular fund for at least 20 years and look at
total amount of capital you have accumulated,
not whether or how much it beat or underperformed market or this or that fund any given year, 3 years, 5 years, or even 10 year period (Bill Miller's Legg Mason Value fund had great 10 year run, and so did Fairholme, but market really turned against their investing style after that). Haven't looked at their performance over 20 or more year time periods, so don't know if, even with recent faltering, they may end up being at top of best performing money managers over 20 or more year time horizon, but you have to have conviction to hold through these trying periods to even capture that long-term outperformance. IF you are U. S. based in dollars, I think it is easier to continue to hold your nose and
keep dollar cost averaging into VTSMX if you are young and right now were equivalent of 1972-ish bear market in stocks (looking back 30 or 40 years later, it now looks like it was a great time to buy, though you might have thought very differently then and even a decade after you put money into the market).
If you have a good lump of capital to spread between taxable and tax deferred accounts, and you are truly investing for the long-term (really buy and hold investor, not just saying that and break investment strategy when index fund lags badly in hot market where small core of market is powering way ahead of market as a whole and funds concentrated in those sectors are up 50 - 100% for year and broad market is way, way behind that), dollar cost averaging into VTSMX in a taxable account and holding through early years of retirement as you take required distributions of retirement plans, could give you an additional 10 or 20 years of essentially tax-deferred investing in pure stock class to outpace inflation when you start drawing down those funds.
John Bogle's
"tyranny of compound interest" argument is what you really need to understand so you don't sell next time market pundits are again saying buy and hold is dead:
http://books.google.com/books?id=ac...nepage&q=tyranny of compound interest&f=false
VTSMX doesn't try and beat market over short-term, it just takes what market gives it, and in process, will, with very low overall risk, beat vast majority of actively managed funds through prism of decades long time horizon (1% management fee and 2 - 3 % hidden portfolio costs (not sure how high number is) because of heavy portfolio trading, to say nothing of not shareholder friendly management (asset gatherers, not creators of long-term wealth for it's shareholders), plus, despite best research and due diligence, unforeseen mistakes and missed opportunities (e. g. Selected American funds shareholder letter in past about horrible mistake of buying AIG when market crashed post Lehman, but also that they could have made up all losses if they had also bought WFC at that time), also means that, especially if you are chasing a momentum type growth money manager, it is very, very hard to predict who will be winner 20 or more years after the fact. They have to beat unmanaged broad market index with no associated costs by 2% or more average annual return just to keep up with the unmanaged index.
And that says nothing about
harmful "investing" habits of many individual investors (basically, chasing short-term performance and essentially buying high, selling low, and trying to time market in cash when greatest investing opportunities going forward are presenting themselves):
http://selectedfunds.com/downloads/SFSucclInv1211.pdf
Ultimately, unless you truly understand your own investments and the nuances of how your own investing strategy is supposed to create wealth over time (plus honest appraisal of your real tolerance for market volatility and "risk", so to speak), then you are likely to too easily get shaken out of market at wrong times and almost guarantee than you will (badly) underperform market / VTSMX over very extended periods of time.