Theoretical and empirical work in finance over the past 50 years has led to an evolution in our understanding of how financial markets work. For instance, 40 years ago, building on the work of Harry Markowitz on portfolio selection and the efficient diversification of investments, William Sharpe and others initially thought there was only one dimension of expected returns in equity markets—the market itself.

The Standard & Poor's 500 Index returned 5.2% in January. The last time U.S. stocks had a better start was in 1997, when the S&P 500 climbed 6.1% and finished the year with a 31% gain. The MSCI All-Country World Index of shares in 45 nations returned 4.6%, including dividends.

Facts: Indexes have no costs, but funds do. Most funds underperform their benchmark (BM) at a minimum by ther expense ratio and some additional amount related to turnover.

Numerous headlines during the past year caused many investors to fear catastrophes that never materialized. For example, a showdown looms in congress over raising the federal debt limit; nonetheless a plunge off the fiscal cliff has been averted for now. And though Europe hardly solved its problems, the euro zone did not break up. As for China’s economy and stock maket , they did not crash.  And as for politics, Obama’s re-election did not sink the stock market.