Individuals

Actively managed mutual funds are expensive and most underperform their benchmarks. Index and index-like ETFs and funds are inexpensive and transparent. Index funds and ETFs are tax-efficient due to their low turnover, which also lowers transaction costs and contributes to their low expense ratios. They are built to track the indexes they are benchmarked to, eliminating negative surprises. In short, trying to guess which mutual funds that will consistently outperform the market is an expensive gamble that may not be successful over the long term.

Most people understand the risks involved in "having all your eggs in one basket". Many people fail to understand that simply owning a fund that tracks the S&P 500 does not create a diversified portfolio. Research has shown that a truly diversified portfolio, one that contains US stocks (large and small), international stocks (Emerging and Developed markets), fixed income, and real estate (in other words, one that looks like the world allocation) reduces risk (volatility) and improves returns.

Emotion is the enemy of the investor; it causes bad decisions and, inevitably, unchecked, produces costly mistakes. Sometimes these mistakes take years to recover from. Sometimes these mistakes cause losses that will never be recovered; imagine selling your equity portfolio late 2008 /early 2009. Markets are impossible to predict; leaders from last year may be laggards (or worse) the next. Moving your money around according to what markets are doing typically does not work. Create a good plan, let the markets work for you, and stay the course.