1. Skepticism about past returns is crucial. The truth is, much as you may wish you could know which funds will be hot, you can’t and neither can the legions of advisers and publications that claim they can. That’s why building a portfolio around index funds isn’t really settling for average. It’s just refusing to believe in magic.

2. By day we write about Six Funds to Buy now. By night, we invest in sensible index funds. Unfortunately, pro-index fund stories don’t sell magazines.

3. Statisticians will tell you that you need 20 years worth of data that’s right, two full decades to draw statistically meaningful conclusions. Anything less, they say, and you have little to hang your hat on. But here’s the problem for fund investors: After 20 successful years of managing a mutual fund, most managers are ready to retire. In fact, only 22 U.S. stock funds have had the same manager on board for at least two decades.

4. There is one final problem in selecting a winning manager. According to Richard A. Brealey, you probably need at least 25 years of fund performance to distinguish at the 95% significance level whether a manager has above average competence. Another commentator accepted the 25-year time frame, but only if the pension executive is using the perfect benchmark for that manager. Using a less than perfect benchmark may increase the observation time to 80 years.

5. Former Oakmark Fund manager Bob Sanborn, Yackman Fund’s Don Yackman, and former Internet Fund manager Ryan Jacob; these oncerevered fund managers have fallen to earth.

6. People exaggerate their own skills. They are overoptimistic about their prospects and overconfident about their guesses, including which managers to pick.

7. Studies show either that most managers cannot outperform passive strategies, or that if there is a margin of superiority, it is small. It will take Joe Dart’s entire working career to get to the point where statistics will confirm his true ability. In the end, it is likely that the margin of superiority that any professional manager can add is so slight that the statistician will not easily be able to detect it.

8. Most depressing of all, the superstar fund managers in the early 1990s had a disconcerting habit of fading from supernova to black hole: Rod Linafelter, Roger Engemann, Richard Fontaine, John Hartwell, John Kaweske, Heiko Thieme. If you thought they were great, you had only to wait a year and look again: Now they were terrible.

9. Yet even the smartest, most determined fund-picker can’t escape a host of nasty surprises. Next time you’re tempted to buy anything other than an index fund, remember this and think again.

10. None of us is as smart as all of us. After twenty years of watching investment practitioners dance around the fire shaking their feathered sticks, observe that far too many of their patients die and that the turnover of medicine men is rather high. There must be a better way.

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