Why Most People Should Stick With Index Funds

16 Nov 2025

And Why Long-Term Boring Wealth Still Wins

Investing gets strangely clearer the more you learn. There’s a whole universe of flashy strategies, loud pundits, and tempting stock tips — yet almost every road leads back to something simple: low-cost, broad-market index funds. This article focuses on the U.S. market, partly because that’s where most of the long-term research is strongest.

If you already like the slow, steady route to wealth, you’ll feel at home here. If you came looking for thrills and SPY day-trading might be your thing — but odds are, you wouldn’t have read this far.

1. Choosing an Index Fund: The Debate That Doesn’t Matter

I chose VTI. You might like VOO, SCHB, or SCHX.

Here’s the punchline: they’re nearly identical in performance.

All of them track extremely broad stock baskets. Their differences are tiny slivers of weighting methodology, not meaningful performance gaps. Historically, they’ve moved almost in lockstep. Don’t lose months debating basis-point differences.

Costs? Vanishingly low.

Roughly $2–$4 in fees per $10,000 invested.

They’re also tax efficient, especially compared to actively managed mutual funds or even their passive index mutual fund counterparts. ETFs rarely distribute capital gains because they use in-kind creation/redemption mechanisms.

2. The Psychological Superpower of Indexing

Markets wiggle. Sometimes violently.

And humans second-guess themselves even more violently.

Should you sell Google? Buy more Nvidia? Trim Tesla? Hedge your Amazon?

Those questions vanish when you own the whole market instead of a handful of companies.

Indexing lets you skip the emotional roulette wheel entirely and keep your brain for better things — like what should you make for dinner.

3. Cash Drag and the Power of Staying Invested

Sitting on the sidelines feels safe, but it quietly erodes wealth.

Cash drag is the lost return from keeping money uninvested while markets rise.

Regular contributions — automating every paycheck — minimize this. You still need an emergency fund, but everything above that should march steadily into your index fund.

4. Why Active Management Usually Loses

Money managers love active funds because they collect fees — often 1% to 2% of your portfolio — whether you make money or not.

But the data is brutal:

Most active managers underperform their benchmark after fees and taxes (SPIVA reports show this year after year).

Why?

• Higher fees drag performance

• Constant pressure to “look good” each quarter

• Prematurely selling winners to lock in quick results

Their incentives compete with your long-term interests.

If retail investors stick to index funds, managers lose their cut. So they’ll rarely give you a fully honest comparison.

5. Financial Entertainment Is Not Financial Advice

CNBC exists to keep you watching, not to make you rich.

Panic sells ads. Drama boosts ratings.

Markets almost always overreact to short-term news.

Long-term investors benefit most by turning off the noise.

The old joke is true:

The best-performing portfolios often belong to people who forgot they had accounts — or who have passed away.

6. Time In the Market Beats Timing the Market

The math is unforgiving.

Missing the best 10 days in the market — often clustered around the worst days — slashes long-term returns dramatically.

Staying invested matters far more than predicting the next dip.

7. Stocks vs. Real Estate: The Comparison People Avoid

Zoom out 100 years.

After inflation, dividends, and fees, U.S. stocks have outperformed nearly every asset class.

Real estate sounds great because:

• They forget long periods of stagnation

• They overlook costs: property taxes, insurance, maintenance, repairs, agent fees

• They ignore the opportunity cost vs. stocks

Rental cash flow often looks good on paper. But the S&P 500’s combination of price appreciation plus dividends typically wins over long time horizons.

Real estate also suffers from:

• Turnover costs — 6% realtor fees

• Slow transactions — hard to sell during recessions when you’re most likely to need cash

Selling ETFs takes minutes on your phones. Funds can be converted to hard cash in 5 business days.

8. Liquidity: A Hidden Advantage of Stocks

Need $5,000 for an emergency?

Sell a few ETF shares at 10am, get the money in your account in less than a week.

Need the same from a house?

Good luck.

HELOCs take time, paperwork, fees, and assume you still have a job.

Stocks offer granularity. You can sell $500, $5,000, or $50,000 with a click. Real estate can’t compete with that.

9. Individual Stocks Are Fun… and can also be dangerous

Amazon, Apple, Nvidia — they all look unstoppable until suddenly they aren’t.

Corporate dominance rarely lasts decades.

Jim Cramer (ironically) has one good rule:

Keep the bulk of your money in index funds and scratch your stock-picking itch with less than 10% of your portfolio.

It protects you from catastrophic errors without killing the fun.

10. International Exposure: How Much Do You Need?

Global diversification matters.

International stocks and U.S. stocks tend to take turns outperforming over 15–20-year cycles.

Limited reliable research data for foreign companies may be available.

Just buy a broad international ETF — think VXUS or similar.

A reasonable (and widely cited) range is 20–40% of your equities in international markets.

No one knows the perfect percentage. Just don’t ignore the rest of the world completely.

11. ETFs vs. Mutual Funds

ETFs are generally more tax-efficient thanks to their structure.

Mutual funds may make sense when:

• You want automated monthly investments without thinking

Inside retirement accounts, tax efficiency differences don’t matter.

If you have discipline, ETFs usually win.

Dollar-cost averaging works with both: investing a fixed amount regularly buys more units when prices fall and fewer when prices rise.

12. Gold, Crypto, and Other “Decorations”

Gold, bitcoin, and similar assets may have low correlation with stocks, but a tiny allocation doesn’t move your long-term results much.

For most people, developing the temperament to stay invested matters far more.

13. Bonds: Useful, But Mostly Later in Life

Bonds don’t perfectly hedge stocks, but they reduce volatility.

After the unusually bad bond years of 2021–2022, many investors are rethinking bond timing.

If you’re younger and decades from retirement, stocks can dominate your portfolio. As you get closer to retirement, bonds become more important for stability.

14. Sector ETFs: Tempting, But Often Costly

Sector ETFs can help if you want to overweight or underweight a specific part of the economy. But:

• They tend to have higher turnover

• They behave very differently from broad index funds

They’re tools — but not core holdings.

15. Dividend or “Value” ETFs Near Retirement?

Funds like SCHD or VTV sound appealing.

But they’re still correlated with the market. They may be less volatile, but they:

• Underweight sectors driving most long-term gains

Instead of tilting heavily into dividends, keeping a cash buffer often protects retirees better.

16. Avoid Annuities Unless You Fully Understand Them

Annuities are complicated, expensive, and often packed with fees that quietly enrich the sellers. They can play a role for specific people, but they’re sold far more often than they should be.

17. Venture Capital, Startups, and Private Equity

The wins are huge.

So are the losses.

Survivorship bias hides the graveyard of failed companies.

If you want to invest in private deals, treat it as a separate risk bucket — comparing those exponential gains are not being compared here.

18. Fidelity Zero-Fee Funds: Free, But Not Equal

Fidelity’s zero-fee funds track proprietary indexes instead of the true S&P 500 or Total Market indexes. They’re effectively loss leaders to bring customers into Fidelity’s ecosystem.

The “free” comes with a trade-off:

Tracking error — small but real — can cost more than the couple of dollars you saved in fees.

Most 401(k)s already offer ultra-cheap S&P 500 funds for around $1.50 per $10,000.

Hard to beat that.

19. Step-Up in Basis and Why Joint Accounts Are Tricky

A subtle estate-planning point:

• Spouses inheriting a joint account do not get a full step-up in basis (depending on state; community property states differ).

This is why many advisers recommend spouses each hold separate taxable brokerage accounts. You still may hold a joint checking account for daily life.

Closing Thoughts

Index funds aren’t exciting. That’s the point.

They harness the power of capitalism without requiring prediction, emotion, or clairvoyance. They quietly compound in the background while life takes center stage.

Long-term investing is ultimately a temperament game — remaining calm, consistent, and invested. Boring doesn’t just work; it wins.

Disclaimer — This should not be construed as financial advice. I assume no liability for any losses incurred as part of your investing process. I recommend seeking guidance from a qualified professional advisor before making investment decisions. I do not work in finance; I’m simply an enthusiast with an interest in money management, and my opinions are for informational purposes only.