index fund

Example

“Warren Buffett has recommended index funds for most retail investors.”

Memory Tip

An INDEX fund tracks an INDEX — it buys all the stocks in a market index automatically.

Why It Matters

Index funds are the foundation of evidence-based investing. Decades of data show that the majority of actively managed funds underperform their benchmark index after fees. Index funds simply match the market return at minimal cost and over long periods that mathematical advantage compounds into dramatically better outcomes for most investors.

Common Misconception

Many investors assume that if they pick the right active manager they can consistently beat the market. The evidence overwhelmingly suggests otherwise. In any given year roughly 50% of active managers beat the index but finding the ones who will do so consistently over 10 or 20 years in advance is essentially impossible.

In Practice

A $10,000 investment in an S&P 500 index fund in 1990 would have grown to approximately $200,000 by 2020. The same amount in an average actively managed fund after typical fees of 1% annually would have grown to roughly $150,000. The $50,000 difference came entirely from lower costs not better stock selection.

Etymology

Index (a list tracking market performance) + fund (a pool of money) — a fund that tracks an index.

Common Misspellings

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