I have started reading a few books on the advantages of using index mutual funds (or exchange-traded funds, which are like mutual funds but trade like stocks) over actively managed funds. Malkiel's "A Random Walk Down Wall Street" and my current read, Ellis' "Winning the Loser's Game" both lay out a pretty convincing argument: Most mutual fund managers perform worse than the "average" (especially after fees and expenses); it is next to impossible to predict or time the market effectively and consistently over the long term, so picking a good mutual fund manager (like picking good stocks) almost comes down to a guessing game with the odds against you; the top mutual fund performers of any one period tend to perform among the worst during the next period; indexing allows for "lazy" investing, where investors can stick with a basic mix of funds instead of constantly switching stocks or managers; since it is next to impossible to predict equity returns over a given period, the one thing investors can know is the expenses and fees they are paying and index funds carry lower fees than actively-managed funds; index funds tend to be more tax-efficient since they are not constantly buying and selling stocks.
Investing in index funds is such a good idea that professionals like Warren Buffett, David Swensen (who manages Yale's $22 billion endowment) and even crazy CNBC stock picker Jim Cramer recommend it for most investors. I personally favor exchange-traded funds, since they tend to operate even more efficiently than index mutual funds, but I will leave that argument for another day. Basically, index mutual funds are the way to go for most average investors.
I was not surprised, however, when I ran across this article from Kiplinger's online titled Indexing in Question. In it, author Steven Goldberg notes how popular S&P 500 index funds have essentially remained flat from January 2000 through the first quarter of 2008. Goldberg, who admits he personally does not favor passive funds, saying "I think I can pick funds that will beat the market indexes over time. But it's hard as the dickens, and I know I will often fail," warns that good investing is not as simple as putting all of one's money in an S&P 500 fund or even a Wilshire 5000 fund. I completely agree with him on this, though apparently we disagree that index fund investors have some deficiency that causes them to only invest in a single fund.
Of nearly all the information I've read advocating index funds (and there is plenty I have not yet read), I have found no pro-index author who only recommends investing in a single fund, even if it does diversify across a broad range of stocks (like 5000 of them). Instead, most experts I've read have recommended a portfolio suitable to one's age and risk-tolerance, composed of index funds properly diversified among small, medium and large capitalization growth and value stocks, as well as bonds, foreign stocks and (often) real estate.
My feeling (and hope) is that people who research the value of indexing also recognize the value of proper diversification, which is key to any portfolio of actively-managed funds as well.