The longer the time period, the better index investing looks.

I learned this while doing a new examination of mutual fund performance. In it, I learned that the Vanguard 500 Index fund ranked 46th of the 306 domestic equity funds with 20 year track records. That means it did better than 85   percent of its competitors.

And that's only counting the surviving competitors--- some of the funds in operation twenty years ago were quietly liquidated to prevent further embarrassment to their management companies.

Twenty years is a long time.

While most of us will be investing for at least twice that long, investment data sources often treat 10 or 15 years as long term. Morningstar Reports, the Rosetta stone for a generation of investors, shows fund performance out to 15 years in its regular reports.

In a way, this isn't surprising. Only 580 of the current 8,187 domestic equity funds existed 15 years ago. In addition, the average tenure of a portfolio manager is only 3.8 years.   For most of the funds we are offered, examination of long-term performance may be either irrelevant or impossible.

The long term, however, is still what really counts. We can get to it by using some of the advanced   features of Morningstars' database.

Measured in dollars, the 12.93 percent annualized return of the Vanguard 500 Index fund (excluding any taxes) would have turned $10,000 into $113,811. Not a bad trick for being cheap and passive instead of active and clever.

The result brings up a tough question: what are the odds that anyone--- anyone--- would have been able to pick a better performing fund?

My answer: Not very good. The odds that you or I could do it, then or now, are very poor. Sadly, the odds that a commission compensated advisor could do it are worse.

This has nothing to do with competence. It has everything to do with what's on the menu. Many of the funds that did better than the index choice were no-load or low-load funds. All four of the low-load funds, for instance, were Fidelity offerings: Fidelity Select Healthcare, number 1 on the chart below with a 17.87 percent return for 20 years, Fidelity Select Financial Services, number 3 with a 16.39 percent return, Fidelity Contrafund, number 9, with 15.43 percent, and Fidelity Magellan, number 10, with 15.42 percent.

Another 23 funds were no load funds. Since they are not distributed through brokerage firms they would not have been on the "menu" of choices a registered representative could have offered.

Of the 45 domestic equity funds that did better than the Vanguard 500 Index, only 18 were load funds. So there was about a 6 percent chance (18 out of 306) that a load fund would have done better than the mother of all index funds. Those aren't very good odds.

This doesn't mean you were doomed to poor performance if you went through an advisor.   New York Venture fund, now called Davis New York Venture, had a good reputation 20 years ago and has returned 15.75 percent for the period, ranking 5th. Similarly, the American Funds group looms large on the list. Four of their funds did better than the index--- Washington Fund, 22nd at 14.16 percent; Fundamental Fund, 26th at 14.01 percent; Growth Fund, 29th at 13.94 percent; and Investment Company of America Fund, 31st at 13.84 percent. As I have pointed out many times, brokers who put their clients in these funds---and kept them in--- served their clients well.

The most important observation, however, isn't about whether funds have loads, low loads, or no load. It is about whether they are managed or passive. Enter the active management game, with or without a broker, and the odds are against you. Since we are talking about investing for retirement, not about taking a flyer on the lottery, our 'bet' should be on the choice with the best chance for success: index investing.

A rank ordered table of the long-term top 20 percent of domestic equity funds is shown below.

Tuesday: Index Investing and the Future

  

Long Term Performance--- Top 20 Percent of Domestic Equity Funds
All figures for the period ending September 30, 2002
Fund Name	Morningstar Category	20 Yr ATR*	20 Yr Rank
Fidelity Sel Health Care	Specialty-Health	17.87	1
Sequoia	Large Value	16.70	2
Fidelity Sel Fincl Svcs	Specialty-Financial	16.39	3
FPA Capital	Small Value	15.96	4
Davis NY Venture A	Large Blend	15.75	5
Dodge & Cox Stock	Large Value	15.65	6
Liberty Acorn   Z	Small Growth	15.54	7
Waddell&Reed Adv Sci A	Specialty-Technology	15.47	8
Fidelity Contrafund	Large Blend	15.43	9
Fidelity Magellan	Large Blend	15.42	10
Mairs & Power Growth	Large Blend	15.32	11
Spectra N	Large Growth	15.21	12
Mutual Shares Z	Mid-Cap Value	15.12	13
Legg Mason Value Prim	Large Blend	15.10	14
MainStay MAP I	Mid-Cap Blend	15.00	15
Mutual Qualified Z	Mid-Cap Value	14.93	16
AmCent Ultra Inv	Large Growth	14.50	17
CGM Capital Development	Mid-Cap Value	14.35	18
Wells Fargo SIFE FinSvc A	Specialty-Financial	14.29	19
Selected American	Large Blend	14.26	20
Century Shares Trust	Specialty-Financial	14.25	21
Amer Funds WashingtonA	Large Value	14.16	22
AXP New Dimensions A	Large Blend	14.10	23
Mutual Beacon Z	Mid-Cap Value	14.08	24
Elfun Trusts	Large Blend	14.01	25
Amer Funds Fundamen A	Large Value	14.01	26
Fidelity Congress Street	Large Value	14.00	27
Putnam Voyager A	Large Growth	13.95	28
Amer Funds Grth Fund A	Large Growth	13.94	29
AIM Constellation A	Large Growth	13.90	30
Amer Funds Inv Co Am A	Large Value	13.84	31
Liberty Select Value A	Mid-Cap Blend	13.83	32
Waddell&Reed Adv Core A	Large Blend	13.78	33
Salomon Bros Opportunity	Large Value	13.63	34
Pennsylvania Mutual Inv	Small Value	13.60	35
Enterprise Growth A	Large Growth	13.54	36
Dodge & Cox Balanced	Domestic Hybrid	13.48	37
Federated Cap Apprec A	Large Blend	13.48	38
ING Corporate Leaders Tr	Large Value	13.36	39
Delaware Trend A	Mid-Cap Growth	13.33	40
PIMCO RCM Mid-Cap Instl	Mid-Cap Growth	13.33	41
Putnam Health Sciences A	Specialty-Health	13.31	42
Waddell & Reed Accumul A	Large Blend	13.28	43
Vanguard Windsor	Large Value	13.24	44
State St Exchange	Large Blend	12.94	45
Vanguard 500 Index	Large Blend	12.93	46
Eaton Vance T-M Gr 1.0	Large Blend	12.89	47
Fidelity Exchange	Large Blend	12.89	48
Endowments Growth & Inc	Large Value	12.88	49
Lord Abbett Affiliated A	Large Value	12.86	50
Amer Funds Amcap A	Large Growth	12.85	51
Vanguard Wellington	Domestic Hybrid	12.81	52
Eaton Vance Lg-Cap Val A	Large Value	12.78	53
Janus	Large Growth	12.73	54
General Elec S&S Program	Large Blend	12.73	55
Van Kampen Growth & IncA	Large Value	12.73	56
Credit Suisse Sm Val A	Small Value	12.71	57
Van Kampen Emerg Grth A	Large Growth	12.70	58
Amer Funds Amer Mut A	Large Value	12.70	59
Alliance Grth & Inc A	Large Value	12.70	60
Fidelity Puritan	Domestic Hybrid	12.68	61
Source: Morningstar Principia, 9/30/2002 data * Annualized Total Return