ARROYO GRANDE, Calif. (MarketWatch) -- Guess what? Actively managed mutual funds are bad news, filching your hard-earned money.

Year after year they continue their dark legacy, proving what former Sen. Peter Fitzgerald said during his reform fight five years ago: "The mutual fund industry is now the world's largest skimming operation, a $7 trillion trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice of the nation's household, college and retirement savings."

The fund industry defeated the senator's efforts. Back then Morningstar's boss Don Phillips added that funds "lost their moral compass." Today it's far worse. Greed drives this industry. The "world's largest skimming operation" has now lost over 50% of America's savings in the decade since the peak of 2000. The track record of actively managed funds during the recent subprime-credit meltdown continues to prove that the industry is failing America.

The only way to invest is with index funds, which make up just 14% of the total. As "Kiplinger's Annual Guide" once said about building index-fund portfolios: "If you're picking from among the best funds to start with, then all you really need for diversification is three stock funds and one bond fund -- and you can forget the other 9,111 funds." Yes, forget about 99.9% of all mutual funds.

As Vanguard's founder Jack Bogle succinctly put it: "Common sense tells us -- and history confirms -- that the simplest and most efficient investment strategy is to buy and hold all of the nation's publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns."

A portfolio of index funds does the trick because it's diversified broadly across more than a thousand stocks and bonds in the market.

Let's rumble: lazy investors vs. active-managed competition

Still skeptical? OK, the facts, and a competition. Let's compare the performance of a half dozen of America's most popular actively managed funds touted in ads and the financial press over the years. We'll compare them to our eight Lazy Portfolios. As you do, keep in mind one crucial point: The big sales pitch for actively managed funds is that their managers are supposed to "add value" by beating the market indexes, right? Wrong.

For comparison, we picked six perennially popular funds: Fidelity Magellan, Dodge & Cox Stock, Legg Mason Value, Janus Fund, Baron Growth and American Funds' Washington Mutual.

And keep in mind the compensation paid to the managers of America's hot-shot funds typically equals 10 or more times the income of the average American. Unfortunately, as you'll see, they still lost a lot of their investors' money.

By comparison, all eight Lazy Portfolios are already sporting positive average annual returns on a 5-year basis. Plus they also beat all six of the popular actively managed funds on 1-year and 3-year average returns. I repeat: All eight Lazy Portfolios are outperforming every one of these popular actively managed funds. Apparently these actively managed funds exist for only one reason ... to make their managers rich, not their own investors.

First, notice that three of these actively managed funds barely matched the performance of the S&P 500 the past year. In addition, the other three underperformed the S&P 500 by three to seven percentage points.

In short, even though we know that the average compensation of portfolio managers is often $400,000 to more than a $1 million, the hot-shot managers of these actively managed funds provided no value-added to their funds' performance. Conclusion: Their investors would be better off investing in index funds.

As of June 30, 2009

Now, let's compare the performance of those six actively-managed funds to the performance of our eight Lazy Portfolios as of midyear 2009. Notice that all eight Lazy Portfolios beat the benchmark S&P 500 across the board for all three time periods. Yes, the market was in negative territory the past few years, but still all eight Lazy Portfolios outperformed each of the six actively-managed funds.

Lazy Portfolio Number of funds 1-year return 3-year annualized return 5-year annualized return Aronson Family 11 -18.7% -3.06% 2.76% Fund Advice 11 -15.8 -2.18 3.12 Smart Money 9 -15.9 -3.70 1.58 Coffeehouse 7 -15.0 -3.69 1.46 Yale U. 6 -21.8 -5.02 1.72 No-Brainer 4 -19.8 -4.74 1.08 Margaritaville 3 -19.8 -3.03 2.26 Second-Grader's 3 -24.3 -6.07 0.68 S&P 500 -26.2 -8.22 -2.24

As of June 30, 2009

These are midyear numbers. You can also find automatic daily updates at You can also find automatic daily updates at MarketWatch.com/lazyportfolio.

Here's why Lazy Portfolios are a winning strategy. It's based on the Nobel Prize-winning Modern Portfolio Theory: Simple well-diversified portfolios of three to 11 low-cost, no-load index funds that require no active trading, no management. You let them do the work passively without tinkering with allocations. Just add new money from your regular savings to rebalance and build your retirement nest egg.

(Warning: Wall Street bankers and brokers hate the Lazy Portfolio strategy because they can't get rich on index funds, no front-end commissions, no excessive annual management fees).

Six rules for success

Now here's how it works: Six simple rules guaranteed to help you diversify, lower risks, level out bull/bear cycles and generate returns that beat the indexes without buying high-expense actively managed funds or wasting your valuable time playing the market. Customize your own Lazy Portfolio following these six rules and you'll win. More important, you'll have lots of time left to enjoy what really counts, your family, friends, career, sports, hobbies, living.

Market timing is for chumps and chimps. The market's random, irrational and unpredictable. You can't beat it. It loves humbling the mighty. Active trading makes no sense for America's 95 million passive investors, because fees, commissions and taxes kill returns. Besides, Prof. Terrance Odean's research proves: "The more you trade the less you earn." Back in the '90s a chimp throwing darts beat the stock market, made a monkey out of Wall Street. It's easy, you can too. Frugality, savings versus financial obesity. Tools like starting early, autopilot saving plans, dollar-cost averaging, frugal living and other tricks are familiar to long-term investors. Trust your frugality instincts -- living below your means -- it's a trait common among America's "millionaires next door." The explosive power of compounding. Albert Einstein, the jolly genius "Man of the Century," says that compounding is the world's most powerful force. Regular savings -- expanding explosively, building on top of itself -- is money power. Start early, with just $100 a month, you can retire a millionaire. Diversification -- the lost art of being average. Don't be greedy, be average. If you put all your eggs in one basket, like speculative condo-flipping, and it goes belly-up, you end up with a burnt omelet. Dividend reinvestment guru Chuck Carlson's says: "Swing for singles." Just being average wins. Buy (quality) and hold -- and you'll never sell. Ignore all the latest desperate Wall Street hype about "the death of buy and hold." They want to con you into paying their high fees and commissions. Warren Buffett's favorite holding period is "forever;" his best time to sell is "never!" So ignore Wall Street's "tips," do your homework, buy index funds with the idea you'll never sell, and win. Do it yourself: The Tortoise consistently beat the Hare. Think long-term: I remember Ric Edelman's amazing research: Millionaires spend less than three hours a month on personal finance, just six minutes a day. So, when you're ready, step up to the starting line and race like a tortoise. Discover how America's slowest, laziest portfolios get you on the road to retirement as a enlightened millionaire.

So that's our little crib sheet on how to build a lazy retirement portfolio. For more info, check out my book, the "Lazy Person's Guide to Investing." This method is so easy even a second-grader can grasp this stuff. In fact, one did, as you'll see at MarketWatch's Lazy Portfolios, where we automatically update all eight portfolios at the end of every trading day.

Do it and have fun knowing that you'll be beating the S&P 500 plus beating America's popular actively managed funds. But whatever you do, please don't spend too much time on investing, not just because it's a waste of time, but because there really are more important things in life: Loved ones, family, mom, dad, best friends, and doing stuff you love, that makes you happy.