Given that the stock market doesn't seem to know which way it's going, some are calling this a stock picker's market. The description supports the notion that mutual fund managers with discerning tastes and impeccable timing can outperform a market that's going nowhere fast.

That raises the question: Are index funds really better than actively managed funds?

Index funds mirror a broad market index such as the Standard & Poor's 500. Managers of these funds subscribe to all the stocks in the index, then put their portfolio on cruise control. By their very nature, index funds have lower expenses because managers aren't doing as much buying and selling. Moreover, they don't have to spend money researching stocks.

The drawback some people have with index funds is the limited upside potential.

"The best you know you're going to get with an index fund is the [market] average," said Ron Kiddoo, chief investment manager for Cozad Asset Management in Champaign, Ill. "In general, we think actively managed funds will outperform index funds over the long term if the active manager is doing his job."

Advocates of actively managed funds feel the savvy manager can beat the market by discerning which stocks to buy, when to buy them and when to sell them. This is particularly true with stocks of medium and small companies, which are not as well covered by Wall Street analysts.

While the market for the S&P 500 and other large cap stocks is efficient -- investors all have pretty much the same information about a stock and that information is reflected in the price of the stock -- markets for mid- and small-cap stocks aren't as efficient. Managers who do their prospecting in those mines are more likely to uncover gems than they would in the picked over large cap market. Discover a few of those gems and it's easier to beat the corresponding market index.

The extra effort active managers have to make is reflected in their funds' expenses. It costs them more to research stocks, and they are more frequent traders -- two reasons why fees for actively managed funds are higher than index fund fees.

Joseph J. Virostek Jr., a financial planner with First Commonwealth Financial Advisors in Pine, says there's a wealth of evidence suggesting that, over the long run, active managers are not able to outperform index funds. He cites a recent study by a Princeton University economics professor, Burton G. Malkiel, showing that more than 80 percent of active fund managers failed to beat the indexes they measure themselves against over the last 10 and 20 years.

Index funds tend to do better in bull markets, which was the case in the late 1990s. In bear markets, insightful managers can beat the indexes if they time the market well, are properly diversified or do their homework, Mr. Virostek says.

The erratic movement of the current market is giving some investment managers pause for concern. Despite the market's strong recovery from the 2000-02 drought, many believe we are in a long-term bear market. Mr. Virostek says such markets typically last eight to 20 years. The last one ran from 1966 to 1982.

"It's easier for a good active manager to outperform if everything's not doing great," said Brian Merrill of Tanglewood Capital Management in Houston.

However, Mr. Merrill believes the higher expenses for actively managed funds make index funds a smarter choice.

"It's hard to make up that gap," he said. "We pick Vanguard most of the time when we can because they focus on the fee side."

Craig McRoberts, senior vice president of Hefren-Tillotson, Downtown, says that if about 80 percent of fund managers can't beat their respective indexes, that means 20 percent can.

"Our clients look to us and hire us to find those managers," Mr. McRoberts said.

He believes that chances are good that we are in for an extended period of below average returns, the type of environment where skilled active managers stand the best chance of beating the market.

The performance of actively managed funds with the same objective varies widely. Although the differences aren't as significant, not all index funds generate the same results either.

Over the 10 years ended Dec. 31, the S&P 500 generated annual returns of 9.06 percent. Over the same period, the Vanguard 500 Index fund [ticker: VFINX] produced returns of 8.98 percent, nearly 6 percent better than the 8.51 percent returns generated by the Dreyfus S&P 500 Fund [PEOPX]. Nor are all index fund expenses the same. The Dreyfus fund sports an expense ratio of 0.5 percent -- or $50 for every $10,000 invested -- while Vanguard's expense ratio is 0.18 percent.

In choosing between index and actively managed funds, investors shouldn't lose sight of something even more important: asset allocation. Having the appropriate mix of large, mid and small-cap stocks, overseas stocks, bonds, real estate and other asset classes will reduce the volatility of your portfolio.

Investing in just the S&P 500, whether through an index or actively managed fund, is fine when large cap stocks are roaring. But when the bubble breaks as it did in 2000, you better have some eggs in other baskets.

"When [the S&P 500] is down 6 percent for the year, there's no way to get around it unless you're in another sector of the market or you've got yourself diversified," Mr. Virostek said.