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How do you make a small fortune in the stock market? That's easy: Start with a large fortune.

Actually, while there may be some truth in the above joke, the stock market can provide financial gains - if you are careful and don't get greedy. I have made a lot of money in that market. (Though truth be told, much of it was from options my former employer granted most employees). Remember that when you invest in a stock, you are buying a small part of the company. As an owner, you are entitled to a share of the profits if any. Of course that "if any" is a big if. Not all companies make a profit, nor do those that are profitable necessarily make enough to justify the cost of the stock. On the other hand, some companies do well enough to make a very nice profit for their stockholders.

One of the simplest ways to buy stock is a mutual fund. These come in two basic types, managed funds and index funds. The idea behind both is that the average investor can own lots of different stocks which reduces risk. Most investors cannot afford to buy stock in hundreds of companies, but these funds combine money from many investors to allow that. Managed funds hire experts to decide which stocks the fund will own. Of course it costs to pay the managers, so they take a portion of the proceeds.

Index funds, on the other hand, buy the stocks listed on an index such as the S&P 500 stocks. This puts them on autopilot so to speak and does not require a fund manager to be constantly trading. In general index funds outperform managed mutual funds, both because they charge much less in commissions, and because it is just darn difficult to consistently pick stocks that beat the market.

At this point, some readers probably want to throttle me. They will point to managed mutual funds that have done better than the market. However remember, past performance is no guarantee of future results. Investment companies start lots of mutual funds. Some do well, some do not. You would expect that just from chance. Guess which ones they keep and hype in their advertising?

Suppose, for example, that such funds have a 40% chance of beating the market. Of 1000 funds started last year, 400 will be listed this year as having done well. Next year, 160 will still be listed as great stocks. The following year 64 will have beaten the market for their entire history and by the fifth year we will still have 26 "great" funds that beat the market for the entire four years of their history. That can be due entirely to

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