Index funds strive to match a specific index, and they do that by holding the same securities as the one the named index tracks. These funds are passively managed, meaning that there's not a lot of trading going on, and that translates to lower expenses for you. The investment objective of this fund type is to mirror an index, the most popular of which is the S&P 500. From 1987 through 1997, the S&P 500 performed better than 81 percent of general equity funds. Then from 2001 through 2007, the S&P 500 trailed about half of actively managed funds. Index funds proved their worth during the down markets of 2008 as well, disproving the commonly held belief that active management does better in bear markets. In fact, S&P indexes outperformed managed funds in all categories but one (large value stocks) during the 2008 bear market. That includes the gold standard itself: The S&P 500 index outperformed 54.3 percent of all large-cap funds in 2008.

Index funds offer an easy way to stick with a successful benchmark that everyone uses — and they are not limited to popular benchmarks. There's an index to track virtually every kind of investment there is, from micro-cap stocks to South American stocks to natural resource stocks. They allow you to be in specific sectors and to invest in both growth and value stocks, giving you maximum diversification. If the benchmark is the standard, after all, why not go with it?