Excerpted from Common Sense on Mutual Funds by John C. Bogle, pages 88-90

Like most people, you may well be an investor who would like to control your own investment balance. Fair enough. I turn now to a second example of the value of simplicity - a single equity index fund for your stock portfolio. Again, during the past 15 years, the record of indexing has been truly remarkable. The total stock market index (Wilshire 5000) has outpaced the average diversified equity fund by 2.5 percentage points per year. Again, the index fund captured 99 percent of the annual market return of 16.0 percent. The cumulative result is really quite imposing, with an added return of more than $23,500 - more than two times the value of the initial investment (see Figure 4.3). This difference arises largely because total fund costs (expense ratios plus portfolio transaction costs) themselves ran to about two full percentage points.

As was the case with the balanced funds (only more so), this 15-year equity fund comparison amply justified a simple index approach to capturing the highest realistically possible portion of the market's returns - albeit slightly less than 100 percent.

What I have described here is the very essence of simplicity: owning the entire U.S. stock market (and, for a balanced index fund, the entire U.S. bond market as well); making no effort to select the best manager; holding the asset allocation constant and making no attempt at market timing; keeping transaction activity low (and minimizing taxes as well); and eliminating the excessive costs of investing that characterize managed mutual funds. And it worked. Even if future outcomes of this approach are less successful, it's hard to imagine that they could provide markedly inferior wealth accumulation relative to comparable managed funds. The success of the index fund reaffirms a basic piece of investment wisdom: When all else fails, fall back on simplicity.

Ever the realist, I recognize that few expect that all else will fail. In the real world, lots of all-too-human traits gets in the way of a simple, all-encompassing index fund approach:

• Hope springs eternal.
• I'm better than average.
• Even if the game is expensive, it's fun.
• That example is too good to be true.
• It can't be that simple.

These are common refrains in the words and thoughts of investors who choose to pursue the conventional strategy of relying entirely on actively managed funds to implement their investment strategies.