Smart lists are built based on information you provide - the places you worked, where you went to school, where you live, and your family. These get maintained automatically - when you become friends with someone who lives near you or who went to the same school, they will be added to those smart lists. Same thing if one of your existing friends adds new information such as what school they went to, or if your friend moves to a new location. You can also manually remove and add people to these smart lists.

Standard lists (ie, the type you have right now) are entirely managed by you.

When managing either type of list, you will get suggestions for who to add to the list.