1.1	Introduction

• Own or plan to own actively managed mutual funds.

• Select stocks they think can outperform a market. We call this stock picking.

• Think there are times to be in a market and times to be out of a market. We call this time picking, generally known as market timing.

• Think that active managers with the best track records are the ones to select to manage their investments. We call this manager picking.

• Shift in and out of styles or indexes in an effort to chase returns, e.g., from large cap to small value. We call this style picking.

• Are primarily invested in the S&P 500, thinking this provides adequate diversification.

If you show those signs, you are engaging in active investing and can benefit greatly from this 12-Step Program.

If not, you are well on your way towards understanding the benefits of a diversified portfolio of index funds, which is the basis of Index Funds Investing.

Keep reading, you will soon understand the wisdom of index funds, how much wealth you may have lost in the past, and how much you can accumulate if you learn how to change the way you invest. Let's start!

Step 1

Quotes

" Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement." William F. Sharpe, Nobel Laureate in Economics, 1990, The Arithmetic of Active Management, The Financial Analysts' Journal Vol. 47, No. 1, January/February 1991. pp. 7-9.

" Most investors are pretty smart. Yet most investors also remain heavily invested in actively managed stock funds. This is puzzling. The temptation, of course, is to dismiss these folks as ignorant fools. But I suspect these folks know the odds are stacked against them, and yet they are more than happy to take their chances." Jonathan Clements; The Wall Street Journal, February 27, 2001

" The deeper one delves, the worse things look for actively managed funds." William Bernstein, The Intelligent Asset Allocator

"The sheer magnitude of the difference we discovered between the total returns earned by funds and the results captured by the average shareholder is shocking and tragic." [over 4 years: Funds = 5.7%, Investors = 1%] Charles Trzcinka, Professor of Finance, Indiana University. Money Magazine, June 2002. What Fund Investors Really Need to Know, by Jazon Zweig (see 1.3.3)

" [ Most investors would ] be better off in an index fund." Peter Lynch, famous stock picker, Barron's, p. 15, April 2, 1990

"Over the 10-year period ending 2003, 142 of the largest, smartest pension funds in the USA lost an average 0.3% per year in their active large cap domestic equities programs, relative to simply investing in index funds." Keith Ambachtsheer, author of The Ambachtsheer Letter Independence, p.90 June 8, 2005

" Most of the mutual fund investments I have are index funds, approximately 75%." Charles R. Schwab, Author, Guide to Financial

"So who still believes markets don't work? Apparently it is only the North Koreans, the Cubans and the active managers."   Rex Sinquefield, Active vs. Passive Management, October 1995

"..the best way to own common stocks is through an index fund..." Warren Buffett, Berkshire Hathaway, Inc. 1996 Shareholder Letter

" The results of this study are not good news for investors who purchase actively managed mutual funds. No investment style generates positive abnormal returns over the 1965-1998 sample period. The sample includes 4,686 funds covering 26,564 fund-years. " James L. Davis, Mutual Fund Performance and Manager Style, Financial Analysts Journal 57 (2001): 19-27

" The common theme unifying this book is that security markets are nearly efficient, meaning most securities are usually priced appropriately given their risk and return attributes." (from Underlying Philosophy, pp. vii) "Proponents of the efficient market hypothesis believe that active management is largely a wasted effort and unlikely to justify the expenses incured. Therefore, they advocate a passive investment strategy [index funds] that makes no attempt to outsmart the market. " Investments (pp. 349) , Bodie, Kane, and Marcus. [Investments is the leading investment text at business schools. It is used at the nation's top business schools including Harvard, MIT, Chicago, Wharton, and Northwestern and has been translated into several foreign languages.]

" The excitement that a gambler feels when making a bet is equal to the amount he might win times the probability of winning it." Blaise Pascal, 1623-1662, Mathematical Maxims and Minims by N. Rose, Raleigh N C 1988.