[DesertCat]

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The S&P 500 Index is so top heavy. I don't know the exact figures, but I seem to recall something in the neighborhood of 80% of the index return is dictated by the performance of less than 20% of its holdings.

S&P 500 index funds have underperformed over the past few years because of the lackluster performance of the HUGE stocks out there (Pfizer, AIG, MSFT, WMT, etc.)

In reality, the S&P 500 is not really all that diversified. And contrary to what many feel, index funds are actively managed (who do you think decides on which stocks make the list?).

If you are looking for a Large (mega)cap fund, it's decent, but if you want a diversified portfolio the S&P 500 fund is hardly enough.

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Wow. That's a lot of misinformation in a single post. First, you are right that the S&P 500 isn't the best possible index, it's focused on the largest cap stocks. A russell 2000 fund would be better since it exposes you to the broader market.

But index funds aren't actively managed. The indexes are picked on a regular basis (russell is yearly) based on current market caps and liquidity. Berkshire isn't in the S&P 500 because it's relatively illiquid, for example. But the criteria are pretty mechanical.

Managers of index funds do try clever techniques using their cash to earn extra interest to help outperform slightly, but those moves only have a tiny affect. The key is that because their expense ratios are so low (.2-.3%) they tend to match the index results very closely.

And if you think 500 stocks isn't diversified, you and I have entirely different definitions of the word. Certainly it's not "perfectly" diversified, but it's far more diversifed than any actively managed fund I've heard of.

Think about it. An actively managed fund might have 100-200 stocks, and if the fund is large enough, might only be able to buy S&P 500 stocks anyways. So you end up paying the manager 2% a year to churn money around the same universe of stocks.