The Case for Index Investing

Index fund investing has become the dominant wealth-building strategy for individual investors, and for excellent reason. Over the past 15 years, 88% of actively managed large-cap funds have underperformed the S&P 500 index, according to S&P Dow Jones Indices’ SPIVA research. This isn’t a temporary anomaly—it’s the mathematical reality of a competitive market where information advantages are fleeting and fees compound relentlessly against investors.

The simplicity of the approach belies its power. By purchasing a single fund that owns shares in all 500 of America’s largest companies, investors gain instant diversification across sectors, industries, and business models. This broad exposure reduces the impact of any single company’s failure while capturing the overall growth of the economy. When you buy an S&P 500 index fund, you own a piece of Apple, Microsoft, Amazon, Google, and 496 other leading companies.

Perhaps most importantly, index funds eliminate the behavioral mistakes that plague active investors. The temptation to time the market, chase hot stocks, or panic during downturns has destroyed more wealth than any bear market. Research from Dalbar shows that the average equity investor underperforms the S&P 500 by 3-4% annually due to poor timing decisions. Index investors who simply hold through volatility consistently outperform those who attempt to outsmart the market.

Costs matter enormously over time. A 1% difference in annual fees might seem trivial, but over 30 years it compounds to consume roughly 28% of your potential wealth. Index funds with expense ratios of 0.03% vs. active funds averaging 0.68% put hundreds of thousands of additional dollars in your pocket over a lifetime of investing.

Top S&P 500 Index Funds

The best S&P 500 index funds are virtually identical in performance since they all track the same index. The primary differentiator is cost, measured by expense ratio—the annual percentage fee deducted from your investment. Here’s how the major options compare:

Fidelity ZERO (FZROX): Tracks a total market index (not technically S&P 500) with zero fees. Catch: Only available at Fidelity, cannot transfer to other brokers.

Vanguard VOO: The gold standard for S&P 500 investing. Massive scale ($900B+ AUM) and rock-bottom 0.03% fees. Available as both ETF (VOO) and mutual fund (VFIAX).

iShares IVV: BlackRock’s competitor to VOO with identical 0.03% fees. Excellent option if you prefer iShares or already use BlackRock products.

SPDR SPY: The original S&P 500 ETF and still the most liquid (best for traders). Slightly higher fees (0.0945%) make it less ideal for long-term buy-and-hold investors.

Building Wealth Through Consistency

The most successful index fund investors share a common trait: unwavering consistency. Regular contributions through dollar-cost averaging—investing the same amount each month regardless of market conditions—removes emotion from the equation. This approach automatically buys more shares when prices are low and fewer when prices are high, mathematically improving your average cost.

Time in the market matters far more than timing the market. An investor who contributed $500 monthly to an S&P 500 index fund starting in 1990 would have accumulated over $1.2 million by 2025, despite living through the dot-com crash, the 2008 financial crisis, and the 2020 pandemic selloff. Those who attempted to time these events—selling at the bottom and waiting for “safety” to re-enter—typically fared far worse.

The power of compound returns becomes staggering over decades. Consider: A 25-year-old who invests $500 monthly until retirement at 65 will have contributed $240,000 of their own money. At the S&P 500’s historical average return of roughly 10% annually, that investment grows to approximately $2.5 million—with more than 90% of the final value coming from investment returns rather than contributions. This is the magic of compound growth working for you over time.

Automation is your friend. Set up automatic monthly contributions from your bank account or paycheck. When investing becomes automatic, you remove the temptation to skip months or make emotional decisions based on market headlines.

Beyond the S&P 500: Building a Complete Portfolio

While the S&P 500 provides excellent exposure to large-cap US stocks, a complete portfolio benefits from additional diversification. Consider these building blocks:

Total US Market: Total market index funds like VTI (Vanguard) or ITOT (iShares) add small and mid-cap companies that the S&P 500 excludes. These smaller companies have historically delivered higher returns, though with greater volatility. A total market fund owns about 4,000 stocks compared to 500 in the S&P 500.

International Markets: International exposure through funds like VXUS (Vanguard Total International) or IXUS (iShares) provides geographic diversification. While US stocks have outperformed over the past decade, international markets have led in other periods. Holding both ensures participation in global economic growth regardless of which region leads. Many advisors suggest 20-40% international allocation.

Bond Index Funds: Bond index funds add stability and income to portfolios. The classic 60/40 stock/bond allocation has served generations of investors well, though some modern portfolios adjust this ratio based on age and risk tolerance. Younger investors with 30+ year horizons might hold 90% stocks, while those within 10 years of retirement might shift toward 40-50% bonds. Popular options include BND (Vanguard Total Bond) and AGG (iShares Core Bond).

Simple three-fund portfolio: Many investors achieve excellent diversification with just three funds: a US stock fund (VTI/VOO), an international stock fund (VXUS), and a bond fund (BND). This simple approach captures global equity markets and provides stability through bonds—all for expense ratios under 0.10% combined.