The Dow Jones Industrial Average fell a long way today dropping 387 points and we can all look forward to reading and hearing why in the coming hours. For me, I preach calm. Either you have developed an investment style and portfolio that allows you to rest easy and stay calm over major market hurdles or you are worried silly. If you are worried silly then I still preach calm...of a different sort. You should calmly transform your portfolio to one that does allow you to find peace in down markets. For the calm seekers:

• More cash - less leverage
• Industry (sector) diversification - not specialization
• Large companies paying dividends - not small caps paying nothing
• Index funds - not developing market funds
• Dow Utilities over Dow Industrials
• Time in the market - not timing the market

What would you add to the list to get through difficult markets? What gives you peace, when all around you seems to be behaving badly? Have you made changes or adjustments in your portfolio over the past few months? What were they? Time to share, because this market is going through some real growing pains and your experience and wisdom might help someone. Perhaps some milk and cookies might help.

Those of you who are new to BloggingStocks can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well - INCLUDING ANY BAD CALLS.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.

SEC Chairman Chris Cox called on the mutual fund industry to join him in the "war on complexity." Cox discussed the difficulties that investors have in comparing mutual funds using the SEC's Edgar Database. He also called for more disclosures about 401(k) fees and performance, saying that "We will continue to purge all the legalese and convert it to plain English. But getting rid of the gobbledygook is no easy task. But we want to give every investor the info to achieve sound investment decisions."

I'm highly skeptical about the odds of mutual funds making it easier for investors to compare expenses and performance because, if they did, most people wouldn't buy most mutual funds. If people had a solid understanding of mutual funds and the factors impacting their performance, pretty much everyone would buy the lowest cost index fund they could find. Needless to say, that wouldn't be good news for most investment management companies.

However, instead of complex disclosures and spreadsheets that 99% of individual investors really don't care about, I have a plan. Every mailing/advertisement/prospectus discussing a mutual fund should be required to contain a red piece of paper with the following:

DEAR INVESTOR:

Most likely, the mutual fund that is soliciting your business brags about its track record and its management team's expertise. As an investor, there's something you need to know: None of that matters.

Past performance, Ivy League credentials, and colorful promotional literature have very little impact on a fund's future performance. Here's what matters: The expense ratio. By keeping your costs as low as possible, you will beat more than 80% of actively managed funds.

Investment legends including Warren Buffett, John Bogle, and Burton Malkiel (to say nothing of Ben Stein and Suze Orman) have all said that most investors should stick with passively managed, low-cost index mutual funds. If the fund being advertised here does not fit that description, we strongly advise you to toss the mailing into your recycling bin.

Best of luck in your pursuit of wealth.

Your Friends at the Securities and Exchange Commission

When Warren Buffett talks, investors should listen -- especially when what he says echoes the sentiments of other investing legends like John Bogle and Burton Malkiel, as well as vast reams of academic research: If you try to pick stocks or mutual funds, you will probably not beat the market, especially after expenses. Therefore, your best bet for the long-term is low cost index funds, which are designed to track the performance of indices, such as the Dow or the Wilshire 5000.

At the Berkshire Hathaway (NYSE: BRK.A) annual meeting, Warren Buffet once again expressed his support for passive investing, saying that "A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money...The gross performance may be reasonably decent, but the fees will eat up a significant percentage of the returns," he said. "You'll pay lots of fees to people who do well, and lots of fees to people who do not do so well." He even conceded that he would be "amazed" if Berkshire Hathaway's portfolio outperforms the S&P 500 by more than few points, given its size.

I agree wholeheartedly with Buffett's ideas. There is simply no reason for most investors to buy actively managed mutual funds. On a governance level, his statement about paying lots of fees to managers who don't perform well may strike at the root of the mutual fund problem: They are compensated for gathering assets, not performing well. Given a choice between staying small and doing well or growing large and doing not so well, the choice is obvious for most fund managers: Grow big because the expense ratio is based on assets under management rather than earnings.

The compensation system makes no sense: Why should someone be paid more for underperforming with 100 million in assets than outperforming with 50 million in assets? But until that changes, mutual funds will continue to focus on asset gathering at the expense of shareholder returns. And that's one good reason to stick with index funds.

In an article that is sure to be torn apart more than a few times soon, Rich Dad, Poor Dad author Robert Kiyosaki recent stated that a friend of his would rather play the lottery than invest in mutual funds. To a point, I agree (somewhat) with that: most mutual funds are atrocious tools for growth. The loads, the management ineptness and the fees are all considered by many industry veterans to be one of the worst ways to invest your money. Consider John Bogle (founder of Vanguard), Peter Lynch (of the famed Fidelity Magellan fund) and former SEC Chairman Arthur Levitt. All of these respected individuals have spoken on the high costs and poor returns of the average mutual fund. Yet, financial advisers and licensed brokers dole them out to customers like candy to a baby.

But, the devil is in the details here -- not all mutual funds can be grouped into a big basket. No-load index funds are great investment vehicles for most novice investors in the U.S. Rather adventuresome investors may get into individual and speculative stock picking, but for most, the index fund (and a varied bucket at that) is a great way to park that money. Kiyosaki does not even make this distinction. Strike #1. According to a conversation with a friend of Kiyosaki's, 401(k) contributions, IRAs and profit sharing/pension plans are not wise investments at all. Whoa -- them's fightin' words!

It's true that investment vehicles in areas where investors have little control (like the market) can lead to somewhat of a gamble, is playing the lottery any better? Based on the track record of the market (and index funds in particular), do lotteries have a better return? It's true that past performance is no guarantee of future results, but with a few grand, what do you trust? An index fund or REIT or maybe a few hundred lotto tickets?

While there is a semblance of thought in the article by Kiyosaki, the premise is lacking in supporting detail and not enough investment vehicles are referenced to make a convincing thought here. I'm still a non-believer in most mutual funds (a waste of time and effort unless you know the manager), but index funds are still the way to go for many investors -- and I'd still put my money into one of them rather than play the lottery. Answer this: would you rather have little control over your investments for the (unknown) chance of a higher payoff or complete control over your investments with a tiny and slim chance for a payoff?

This weekend's Wall Street Journal (subscription required) discussed the Oracle of Omaha's quest to find his successor as Chief Investment Officer of Berkshire Hathaway (NYSE: BRK.A). Buffett joked that they will run the search "like American Idol" and said that he will be looking for someone who already knows how to do it, not an "apprentice."

Here's one of the most interesting tidbits: Warren Buffett says that he isn't impressed by titles and diplomas, and that a college education is not a requirement for the job. Here's what he's looking for: "independent thinking, emotional stability, and a keen understanding of both human and institutional behavior."

If that sounds like you, the rewards could be quite nice: Around 10% of the manager's earnings above that achieved by the S&P 500. But here's the thing: How likely is it that someone will be able to do that? In a 1996 letter to shareholders, Buffett wrote: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."

While Buffett has delivered admirable results, I would argue that there can be no assurance his successor will be able to do the same. Given the size of Berkshire's portfolio, he may be better off putting the money in index funds after he retires. Buffett is one in 6.5 billion, and I doubt his successor will be another Warren Buffett.

Warren Buffett has acknowledged investing in Johnson & Johnson (NYSE:JNJ) and the Procter & Gamble Co. (NYSE:PG) in the past few years. Among all the endorsements a company could possibly get, this is better than a 5-Star rating from Morning Star and a a boooyaah! from James Cramer combined. Of course, Mr. Buffett's choices are far more limited than yours or mine, given the size of Berkshire Hathaway (NYSE:BRK.A), the vessel he is navigating that could have been included in this review as well.

I was looking once again at large, well diversified companies that are broadly held by institutions and individuals alike that most investors would generally agree are safe havens. To round out the discussion, I have added General Electric Co. (NYSE: GE) and PepsiCo Inc (NYSE:PEP). There are several others that could be added to this group but I have enough for this post's purpose.

The question is whether investors are better off buying into a few broadly held index funds or better off holding a few dividend paying large cap stocks? I am a firm believer in keeping at least half of the money you save, invested in the stock market, placed in indexed mutual funds, or exchange traded funds with low fees and low stock turnover, minimizing short term capital gains.

The S&P 500 has announced several changes to the index. Ensco International (NYSE:ESV) is replacing BellSouth (NYSE:BLS). Cimarex (NYSE:XEC) will join the S&P Midcap 400. Hornbeck Offshore Services (NYSE:HOS) will join the Small Cap 600.

As the stocks are added to major indices, many index funds will be forced to buy them to stay current with the indices they track. Other "closet index funds" may add them as well. Should you?

If history is any guide, probably not. According to a piece in last week's Wall Street Journal [subscription required]: "... buy stocks that have been removed from the S&P 500. Those that suffered that indignity this year are up 27% on average since removal, while those that were added to the index are up only 1% since joining, notes Paul Hickey of Birinyi Associates."

While there were no stocks demoted in this group (BellSouth is no longer listed as it was acquired by AT&T.), the data would seem to suggest that investors may do well to avoid ESV and possibly HOS and XEC too.

Each week (usually on Saturdays), I'll bring you my list of the four best pieces from the Wall Street Journal for the past week. Did I miss an article you thought was great? Leave a comment and let everyone know.

All right, below are my picks for this past week (note that log-in is required to read the full articles):

1. Boiling Down Top Finance Books This piece lists the bestselling finance books of the past year: and two of the top three are the worst personal finance books I've read: Why We Want You to be Rich and Rich Dad, Poor Dad.
2. Can Spending a Day Stuck to a Velcro Wall Help Build a Team? I've participated in some of these team-building exercises and didn't feel like I got much out of them. But I suppose it depends on the situation. Jared Sandberg has an interesting piece on it.
3. Index Funds 30 years ago, Vanguard started the index fund revolution, Smart Money comes out with their list of the better large-cap and small-cap index funds. These are a must for passive investors and retirement funds.
4. Up for Review: 401(k) Industry With calls for Congressional hearings about collusion hurting 401(k) investors, keep up to date with the controversy.
   

Picking stocks is fun. It's exciting. It can be very rewarding over a short period of time. Better yet, it can give you bragging rights at holiday parties.

Buying and holding mutual funds has none of those benefits. But it can be quite rewarding over the long term and is a very affordable way to invest. (For more on this, see, "Top5 Low-Cost Mutual Funds."

There are lots of great reasons to make mutual funds the core of your portfolio. Here are seven to consider:

1. Funds are easy. Never invested before? Just call your favorite discount broker or no-load fund company (Vanguard comes to mind), tell them you want a good solid fund for your first investment (large-cap growth or S&P Index funds are good options for first-timers) and they'll hook you up. No muss, no fuss. You'll be investing before you know it.

2. Funds are cheap. Think about it: Buy a no-load fund with a very low 0.15% expense ratio and you can invest $1,000 a year, including all trades and administration fees, for just $15 a year. And you thought stock trading for $7 a trade was cheap! (Warning: Not all funds are that cheap.)

3. Funds are professionally managed. Okay, so actively-managed funds don't typically beat the S&P 500 and usually have much higher expenses than index funds. But the best fund managers often beat the market. And you get the benefit of knowing that if the market starts to tank or a major blue-chip stock goes down the tubes, there is a real person at the helm who might be able to sell ahead of the pack.

4. Funds don't implode. Put another way, funds are diversified. That simply means that you get the protection of owning about 50 stocks, hopefully in an assortment of different sectors, so your risk of having one stock-specific disaster decimate your portfolio is minimized.

5. You can always have fun with stocks on the side. Once your core portfolio is buttoned down with stable, diversified growth funds, then you're free to use long-term conservative and short-term speculative stock-picking to add some excitement to the mix -- without having to worry about screwing things up too badly.

6. ETFs. That stands for exchange-traded funds. They are index funds that trade like stocks. So you can enjoy the excitement and tax advantages of trading stocks, while getting the low fees and diversification benefits of funds.

7. Funds are fun. Okay, they may not be as fun as owning stocks. But the best fund companies will make you feel like part of a smart, exclusive club. If you're lucky, your fund manager may even write entertaining newsletters and show up in magazines now and then. Most important, good funds have consistent long-term positive results. You may not feel much like bragging about earning a steady 10% a year. But you'll certainly be able to pat yourself on the back for a job well done come retirement.

If you read any of the many business magazines that I read (which is most of them), you will find that they give some very good advice regarding the benefits of investing in Index Funds over the long haul. However, once a year they publish things like the "Top 1,000 Funds" and variations on this theme. To me this contradicts their year-round advice just to generate an extra issue that serves no purpose except to confuse investors. I think 90% of the 1,000 funds are garbage and exist only to generate revenue for the investment company. They cater to a public fascinated by quantity of choice and various meaningless nuances and not by good sense.

Most of the data I have seen supports the premise that index investing (notably the S&P 500) beats stock picking (higher Internal Rate of Return (IRR)) over any 20 year period you choose. Plus, it has the added benefit of less market volatility. This makes it the optimal choice for most people. This is even more true when you consider taxes and fees.

Furthermore, if it were not true then investment guru and fund manager Bill Miller of Legg Mason would not be such a celebrity for beating the Standard & Poor's index for 14 years running. Have you read about any others? NO! There are many advisor's who may beat the index funds for a period of time, but not a long period, and it is usually not the same ones.

Business publications, such as Time Warner's Money and Fortune, should have a disclaimer accompanying their fund reviews. Or, giving them the benefit of the doubt, perhaps I should view these mag-rags as the publisher's way of giving us an opportunity to see for ourselves that none of these funds provide much added value -- unless you own the fund company.