Emerging-market funds, too, were losers despite soaring 27 percent in the last year. And the precious metal funds that invest in gold and silver mines lost 8.3 percent during the quarter despite the allure of gold. Health-care stocks, which nobody wanted after the health care overhaul, became last quarter's winners. People in health-care funds earned almost 7 percent.
The humbling lesson of the last quarter is that it's difficult to outsmart the stock or commodity markets.
Index funds
Index funds are set up to simply, and cheaply, mimic the stock market or a slice of the market. No clever fund manager is trying to pick gems and avoid land mines. They just buy everything in an index and hold it. During the last three years, 60 percent of fund managers hired to outsmart the S&P 500 index of large company stocks have failed to do so, said Morningstar analyst Michael Rawson. It's difficult for many people to accept this emotionally, he said, because it's natural for people to want to be above average.
"Everyone can't be above average," said Rawson. "The more you trade, and the few times you are correct, do not make up for the costs of trading."
So here's what you can do. If you want to keep things simple, you could set up a portfolio that would include just two mutual funds. One fund would be a total U.S. stock market fund and the other would be a total U.S. bond market fund. Fund companies such as Vanguard or Fidelity offer these options, and if you are saving for retirement you could add money to them from each paycheck. You could divide your money half and half in each. If you are a more aggressive investor years from retirement, maybe you would put 70 percent of your money in the stock fund and 30 percent in the bond fund.
Hands-free portfolio
