The graph below charts the history of the US stock market from 1925 through 2006. In that time $10,000 invested in the market grew to over $25 million. This represents a stunning appreciation of almost 11% annually but it wasn't plain sailing - there were severe headwinds along the way. Therein lies one of the keys to success: always invest for the long term. In fact if you divide the market into 10 year periods, the market has posted positive returns 90% of the time - and there was not a single 15 year period where it didn't appreciate!

they are a normal and necessary part of the markets'cycle. You can clearly see the 1929 crash below and the oil crisis of the 70's and the recent tech-bubble reflected on the top right quadrant in this graph. Yet each time the market fell back, in time it resumed it's steady move forward. Sadly, most investors did not share this experience because they chose active management over strategic index-based investing.

Index-based investing is backed by Nobel laureates who have provided unbiased, rigorous, empirical analysis. Research shows that over a 10 year period, over 90% of active managers and mutual funds under perform their benchmark indexes. You may be astounded to learn that portfolios selected by throwing darts routinely outperform the professionals' selections. While individual stock-picking is like looking for a needle in a haystack, with index investing you buy the haystack.

Active investors pay substantial transaction costs and management fees - and profits are taxed when earned, at ordinary income tax rates. Index funds on the other hand tend to be very efficient since they aren't bearing these heavy costs of management and there are no high-paid Wall Street types involved. In addition, there are far fewer transactions so gains accumulate tax-free over long periods of time, and when they are ultimately taxed it's at far lower long term capital gains rates.

Of the original 30 companies included in the Dow Jones in 1926, only 3 companies have survived.

In these rapidly changing times, selecting which companies - if any - will make it into the future is more difficult than ever. Diversification is a cornerstone of sound investment: Investing in an index reduces the risk that an individual company will fail and impact performance. You always own a piece of the best-of-breed companies in each category.

Research indicates that most of this strong long term upward thrust occurs in surprisingly short intervals. In fact nearly all of the market's total return over this 80 year period took place in just 37 months. Index-based investing ensures that the investor is exposed to these strong but brief spurts. The cost of being out of the market during these surges is almost always far greater than the cost of being in during a cyclical bear market. A recent study reviewed performance of the 32 leading market timing newsletters and found that not one had beaten the S+P 500 over a 10 year period.

Although the most well known indexes are the Dow Jones 30 and the S+P 500, they cover only the largest companies There are many distinct groupings within the market. For example there are indexes for mid-sized and small companies. And the smaller companies frequently perform far better than the larger ones. Over 50% of global equities are now located outside the USA - and trade on the bourses ofEurope, Japan, and Australia. Each of those has an index fund associated with it. There are also indexes to reflect commodities and resources such as gold, oil and metals. In addition to providing the safety of additional diversification, these sub-markets frequently move independently of    each other, thus providing  insulation from excessive volatility.

(For example in 2000 the S+P 500 Index declined by 9.1% while the Russell 2000 Value Index which includes smaller asset-heavy companies grew by 22.8%).

You will note from the right side of the graph on this page that while equities grew to over $29m, the bond portfolio only amounted to $750,000 over the same period. Bonds certainly have their place in a portfolio because they work in exactly the opposite time horizon to equities.

Bonds are best for shorter term needs - they're contractually guaranteed to pay interest regularly and repay principal on a given date so you have certainty of income and principal. The real enemy of bondholders is inflation. So the further out the time horizon, the worse bonds look. Which is why bonds and equities work so well together - equities really shine over the longer term.

You will own a piece of the most successful businesses in a variety of groupings. And you'll have some exposure to natural resources and commodities.  Most importantly, you can sleep peacefully for 20 years...