READERS OF ERIC TYSON'S

"Investing for Dummies" might be a bit surprised by one of the book's main premises: It's OK to be average. It's a hard line to swallow in today's hypercompetitive world, but the common-sense approach to managing money works. "It's not a sexy or appealing message," the author admits, but trying to beat the market is a losing proposition. Rather, investors should be content with returns that equal historical norms.

"I've said be satisfied with index funds, low-cost mutual funds and get the long-term market return," says Tyson, whose series of "Dummies" books covers mutual funds, taxes, home buying, personal finance and small business. Some of his other unsexy advice: Ignore the talking heads, buy and hold, and by all means diversify.

The investing guide, now in its fourth edition, is chock full of similar practical counsel that by Tyson's own admission is neither new nor ground-breaking. But it is timeless and all too often ignored.

When it comes to the stock market specifically, Tyson, a former financial counselor, sets realistic goals. He believes investors should expect to earn an average of 9% to 10% a year on their money over the long haul. Since most people can't beat the markets or the best professional money managers, he recommends sticking with low-fee mutual funds.

Despite the title, "Investing for Dummies" isn't just for folks who think stuffing bills into a mattress is the best way to accumulate wealth. A primer for novices at its heart, it also gets meaty in parts. More complex subjects such as real-estate financing, understanding a company's annual report and buying into a small business are covered. The book is also meant to help fill gaps in the knowledge of more experienced investors especially those who've realized they don't know as much as they thought they did. The common denominator: Novice and expert alike are looking for smart ways to build wealth.

SmartMoney.com: What have you had to amend in the book since the first edition was published about 10 years ago?

Eric Tyson: Well, I'm very proud of the fact that from the very beginning I try to emphasize timeless philosophies. A lot is the same as what it used to be. Obviously, one thing that's changed is the mushrooming of the Internet and 24-7 access to information, which created a whole new level of stress and anxiety for people. They're bombarded around the clock. There's good stuff on the Internet, but there's also some garbage out there. People need to differentiate the good stuff from the bad stuff, so the resource section of the book is new. Certain managed investment vehicles, like fund of funds, targeted maturity funds, ETFs are out now. There are better investment options than there were a decade ago.

SM: You contend that most people are better off not picking their own stocks. Why not? And when is it suitable for people to pick their own stocks?

ET: I don't have a problem with people doing it if they're clear about why they're doing it, and they limit the portion of their portfolio they're investing in stocks. What concerns me is when you use all of your portfolio for stocks. Some people think they can do better than the rest of us and better than fund managers. There are so many books encouraging people to do their own stock picking. The premise is why be satisfied with a 9% to 10% return a year, when you could be making 20% to 30% a year? That's what happened in the '90s with tech stocks.

I feel vindicated because I've said be satisfied with index funds, low-cost mutual funds and get the long-term market return. It's not a sexy or appealing message. If people are going to take 10% to 20% of their portfolio to pick stocks because they enjoy the challenge and learning about the business, then go ahead and do that. I just don't think investors are well-served by that.

SM: Why are you a big proponent of money-market funds?

ET: They're a great alternative to bank accounts. It's a part of the mutual fund industry that doesn't get a lot of exposure. Your principal is not at risk, but you get daily liquidity and check-writing ability. It's a great place for people to keep money instead of their local bank. They're a great place to keep the money parked; you have surety that the money will be there when you want it.

SM: You offer specific recommendations for both stock and bond mutual funds in the book, like American Century Income & Growth and Vanguard GNMA. What's the basis for your picks?

ET: It's common-sense criteria. You want to focus on fund companies with expertise. You want to go with a company that has a lot of success and experience with that type of fund. With bigger companies, you want to ask, what's their batting average with all the funds they have in that category? Who's got low costs? Low costs do translate into higher returns in the long term. That's the reason most index funds beat actively managed funds.

Going forward those high fees are likely to produce more mediocre returns. When you screen funds using those criteria, you're not left with a big number. You need to ask, what's the track record of the fund manager if he's been with other funds?

SM: Why do you think it's a bad idea to invest in sector funds?

ET: I just think it defeats the purpose of being diversified in mutual funds. I confess my own father sometimes does this; he does try to market-time and choose sectors. My point is that you're then putting yourself in the role of portfolio manager. If you're putting your money into an actively managed stock fund, you're paying for them to find promising sectors and stocks. Do you really think you can do better? I think the honest answer is probably no.

I'm also very leery of pundits who are purporting to give market-timing advice, ones who say, "I think the stock market is going to go down, it's time to get out." Or, "I think the smart money is going out of this sector and into that sector...." I tell people to ignore that. Or if you won't ignore it, be darn sure that the person giving advice has a proven track record of being right.

SM: There's a chapter in your book about starting your own business or investing in one. Why do you believe this is a good way to diversify a portfolio?

ET: I don't think it's for everybody. If you look at Forbes magazine or other publications of how the world's wealthiest people built their wealth, many started out with their own business. Ownership in a small business is a common way the wealthiest people built wealth. If you have particular skills and passions and you've got what it takes to run your own business, you can really hit a home run. But there are lots of cautions in there. If you're going to put money into a venture, you have to be prepared to lose it all.

SM: You also write that real estate has the potential for significant profits. Might it be a bit dangerous to advocate this type of big investment as a money maker, especially with heated markets around the country?

ET: There's a simple analysis you can do to determine if there's a bubble. You've got to compare what would it cost you to rent that property vs. what's the cost of owning that property. Look at it on a monthly basis.... Real estate is certainly a great long-term investment but people need to do analysis, especially if they're in places like California, New York or Florida. You've really got to run the numbers for a particular property. There's a new book out now titled something like, "How to Become a Millionaire in Real Estate." That scares me because it makes it sound so easy to do. In most cases, most profit is coming from general appreciation in the market. Real estate has huge transaction costs. If you're flipping in and out of property, you've got to make a lot of money just to cover those transaction costs.

SM: What are some of the most common mistakes you've seen people make with their investments?

ET: People don't do their homework. They'll pick an investment because somebody else recommended it to them. They will not even look at or examine the fees and costs associated with that investment. They'll buy an investment because it has recently produced high returns. In happened in the late 1990s with people buying tech stocks. Someone I knew had bought Amazon.com, and I asked him what the price/earnings ratio was on the stock. And he gave me this look; he didn't know what I was talking about. You have no business picking individual stocks if a) you don't know what a P/E ratio is, and b) you don't know what the P/E ratio is for the company you're investing in.