What's Wrong With Mutual Funds?

Buy an index fund. Approximately 80% of mutual funds underperform the average return of the stock market. Here's what else you need to know about mutual funds.

We know you probably don't want to spend hours learning about the intricacies of mutual fund investing. Even if you've cleared your calendar for some quality fund study time, we don't need to te your afternoon with this topic. So, here are four words that'll serve as the foundation -- heck, make that the foundation, walls, roof, and wall-to-wall shag -- for your long-term success in investing in mutual funds:

Buy an index fund.

There you have it! Thankyouverymuch, ladies and gentleman! We're here every Friday. Please remember to tip your waiters and waitresses.

Still here? All right. You caught us trying to sneak out of work early on a sunny day. Mutual funds are a hot commodity with individual investors and financial institutions. In fact, there are more mutual funds in existence than there are individual stocks -- that's more than 8,000, for those of you taking notes. That amounts to more than $7 trillion invested in these things.

With so much money riding on the success of mutual funds, how can we be so pat with our breezy summation? Well, the fact is that most investors are probably best off buying an index fund -- which is simply a mutual fund that tracks some stock market index, whether it's the Standard & Poor's 500 Stock Index, the entire stock market index, or some other performance measure of a like group of stocks.

Before we get into that, first, a little background.