Dr Burton Malkiel developed his random walk approach to investing 35 years ago. His theory suggests that markets are relatively efficient and so buying index funds (or a representation of the whole market) isgoing to outperform active funds in most cases. Dr Burton Malkiel says telling investors that they can't beat the sharemarket over time is a bit like telling a six year old that Santa doesn't exist. People are optimistic that they can pick the right fund with outstanding performance. The problem is that there are over 10,000 managed funds on Morningstar's Australian database and how do you pick the right one?

The simple and seductive power of chocolate tells us much about our attitudes towards money. In fact, the humble cocoa confection can help us to understand the behavioural patterns that most human beings apply either deliberately or unconsciously when making decisions. In the case of choosing chocolate over a healthier food item, most people will opt for the instant gratification option, also known as the 'seduction of now', or 'putting off 'til tomorrow' those patient, sensible decisions that we intuitively know are good for us. Not convinced? Try the chocolate test.   Ask yourself: 'Which do you want right now, fruit or chocolate?' Most of you are statistically likely to answer 'chocolate!' But if you ask: 'Which one a week from now?' the answer is likely to be, 'Fruit.' Aside from eating, other fields of common human activity also give us leads to the underlying motivators behind our decision making. Like gambling. Stephen Utkus, director of the Vanguard Centre for Retirement Research, says a research article about people's attitudes to gambling that appeared in the prestigious Science magazine says a lot about the psychology of investment.

Setting up your own self managed super fund lets you take control of your own retirement investments. But be careful you don't end up sacrificing long-term returns because of poorly thought-out investment decisions. If you have a self managed super fund, you're probably like many other self managed super fund investors, and control over your investments is probably why you set up your own super fund in the first place. A recent study, conducted by Investment Trends for IFSA (Investments and Financial Services Association), found that 55 per cent of self managed super fund investors said they wanted more control over their super, hoping to save money on fees in the process. But having control over your super means you need to be disciplined and strategic in the investment decisions you make.

What an extraordinary couple of years it's been for Australian shares. After returns adding up to around 75 per cent in just three years, many investors are no doubt patting themselves on the back. The rest are gritting their teeth wishing they had got in to the sharemarket a whole lot earlier, or wondering if they should put their money in now in the hope the party will continue. At times like this even the most rational long-term investor can be distracted from their goals in the hope of shortterm gains or fear of short-term losses. The Head of Retail at Vanguard Investments Australia, Robin Bowerman, says, "What's important now is that people have realistic expectations." As a long-term investor it's as important to look beyond these periods of short-term outperformance as it is to keep faith in the years when the market is languishing. Real returns are not about what happens in a one-year period - or even an extraordinary three-year period like the one we've just had. Any financial plan that is based on the expectation of chasing consistent gains of 20 per cent is set for failure.

Great ideas often have two salient characteristics -  they are simple and they encounter, especially in their infancy, enormous hostility. The concept of indexing, which began being used as an investment tool in the United States mutual funds industry in the mid 1970s, was no exception. Today, the hostility indexing encountered in those years seems hard to credit - until you remember self-interest, of course. The validity of this concept seems selfevident, says Vanguard founder Jack Bogle. It was, in Bogles succinct words, simply this: "Investors as a group cannot outperform the market because they are (his emphasis) the market. And from that theory flows the reality: investors as a group must underperform the market because the cost of participation - largely operating expenses, advisory fees and portfolio transaction costs - constitutes a direct deduction from the market's return.

My father has always bought shares and kept meticulous records of their price movements with hand drawn graphs. He now gets instant updates of prices, dividends and company announcements on his computer. Technology also allows him to trade easily and instead of holding onto shares like he once did, he is what I call a day trader. It is not uncommon for him to buy a share in the morning and sell it by the close of trading. He is not alone. Instead of keeping an investment for around five years or longer, Australians are increasingly buying and selling their shares and managed funds over the short term. In the 1960s investors turned over their shares 17 per cent each year and this means that their entire share portfolio was traded over five years. From 1990 to 2005 the level of turnover increased five times. The average turnover for shares in Australia is 100 per cent each year compared to 125 per cent in the United States. This means the average Australian investor turns over their shares every year while Americans sell their shares every nine months according to research by Vanguard Investments. An Australian investor with $50,000 in shares will be selling and buying $1,000 worth of shares every week.