Q. I found an article on Yahoo Finance, titled "Why Mutual Funds Are Lousy Investments: Why the Rich Get Richer," very interesting. Have you done any columns on this subject--- fund fees---which you can point me to. You have always recommended mutual funds, especially index funds.

---L.L., by e-mail from Dallas, TX


A. The article, by Robert Kiyosaki of "Rich Dad, Poor Dad" fame, uses data on mutual fund expenses to come to the wrong conclusion--- that mutual funds are trash and everyone should be an active investor. If you visit my website, http://www.scottburns.com/ (free but registration required), you'll find a 10-year archive of columns. Many deal with the burden of expenses on performance, the benefits of indexing, and the impact of fees on long term accumulation plans such as 401(k) plans.

There are two collections of columns that you will find particularly helpful, "Club 401" and "Couch Potato Investing." There is also an online calculator that will show you the impact of good or bad company stock on the performance of your plan. Another calculator allows you to "race" different types of investments--- taxable funds, tax deferred funds, variable annuities, etc. --- against each other.

Rather than throw the baby out with the bath water, as Mr. Kiyosaki does, most of us need to invest in mutual funds. But we also need to make the best of what is available to us. That means avoiding high expense, high portfolio turnover funds because the odds are against such funds beating their chosen index.

That's why this column seldom mentions managed funds. It's also why the managed funds that are mentioned--- such as Dodge and Cox International and many of the American Funds--- have very low expenses.

For the same reason I think many people should consider using a brokerage window in their 401(k) account, if one is available. It will enable them to bypass the expenses of the funds offered in their plan and to substitute low cost index funds or exchange traded funds. My employer, for instance, provides a plan from Fidelity. I use the brokerage window in that plan to invest in their major index funds at an expense ratio of 10 basis points (1/10th of 1 percent) for some of the money and use exchange traded funds to fill out the asset allocations. As a consequence, my personal 401(k) plan costs less than 20 basis points a year. This will work for anyone who has been saving in a 401(k) plan for some time and has accumulated assets of at least $50,000.

Reducing mutual fund expenses can, and should, be done.

Mr. Kiyosaki goes hopelessly wrong when he takes avoiding mutual fund expenses to an absurd conclusion. "While index funds have the potential of generating greater returns via lower fees, I would still prefer to be an active investor. Most index funds think a 10 percent to 25 percent return is a good rate. Active investors can regularly beat those gains, especially if they stay away from traditional investments such as savings, stocks, bonds, and index and mutual funds."

That, readers, is just plain wrong. Here's why.

First, if you eliminate "traditional investments such as savings, stocks, bonds, and index and mutual funds" you are eliminating virtually all of the tradable, liquid capital in the entire world. While you and I may want to make some private investments that aren't liquid and tradable, the vast majority of our investments should be just that, liquid and tradable.

Second, the case against active management is extensive. Mutual fund portfolio managers are active investors and about 70 percent of them consistently fail to beat their chosen index. Pension fund managers are active investors and about 70 percent of them consistently fail to beat their chosen index--- in spite of having lower expenses than retail mutual funds.

Hedge funds, the fastest growing and most actively managed money on the planet, also regularly fail to beat the major indices--- and the published figures don't adjust for massive survivor bias because so many hedge funds with bad records simply disappear.

If all those managers, who presumably have training, brains and talent, usually fail to beat a passive index, why should you and I think that we can regularly get returns over 10 to 25 percent a year simply because we become "active" investors in our spare time at home?

The bottom line? All of us need to be active savers. We should limit our activity as investors to the aggressive pursuit of the lowest cost index investments.      On the web:

Scott Burns columns online: Club 401

Scott Burns columns online: Couch Potato Investing

Online calculator: Is your 401(k) plan an eagle or a turkey?