When Average Is Good

Mutual funds may sound perfect, letting you leave your money in the hands of professionals, but consider these things:

• The majority of stock mutual funds tend to underperform the overall stock market average.

• Many charge steep loads (sales fees), sometimes topping 5 percent. Even when funds charge a typical 1 or 2 percent annual expense fee, that can significantly hurt your performance.

• As funds grow bigger (and their managers often try to grow them, so they can collect more in fees), it becomes much harder to deliver strong results. The more money a fund has to invest, the more likely it is to park some in less promising investments.

Fortunately, there's a simple solution. Instead of trying to find those few aboveaverage funds and winding up with subpar performance, you can choose to match the market average. Invest your long-term moolah in index funds designed to track the performance of a broad market index, such as the S&P 500 or the Dow Jones Wilshire 5000. The S&P 500 is an index of 500 leading companies in America. The Dow Jones Wilshire 5000, despite its name, contains just about every U.S. stock — many more than 5,000. It's a "whole market" index.

Index funds usually sport extremely low fees — sometimes less than 0.20 percent (that's one-fifth of 1 percent). There's little turnover within them, too, so commission costs are minimal. Best of all, investing in index funds is simple, taking very little time or energy. Once you've invested in them, you can forget about them (ideally adding money periodically, though). However the stock market performs in the coming years, your index fund won't be far behind.

If you want to beat the indexes, though, we'd love to help. For pointers to many funds that have performed much better than average, test-drive our Champion Funds newsletter for free at www. championfunds.fool.com. Learn more at www.indexfunds.com or read "Common Sense on Mutual Funds" by John C. Bogle (Wiley, $20).