When you start learning about investing, one of the first forks in the road is this: do you try to beat the market, or just ride along with it?

That question leads us to two big strategies—active management and index investing—and over the years, the debate between them has sparked more than a few strong opinions. But today, we want to step back from opinions and look at what the data actually says. This is the kind of information I wish had been handed down to me when I was starting out, and it's something we’re making sure to pass on to our kids.

Let’s break it down.

What Are Index Funds and Active Funds?

An index fund is a type of investment that does something refreshingly simple—it looks to mirror the performance of a market index like the total U.S. stock market or total global stock market. It doesn’t try to guess which stocks will win or lose; it just buys everything in the index generally at market cap weights and holds on.

Active funds, on the other hand, are run by managers who do exactly what the name suggests—they actively make decisions. They research, forecast, and try to pick stocks or sectors they believe will outperform the broader market.

This might sound appealing—and it’s no surprise why. Active management is what dominates the financial media landscape. Tune into most financial news channels or pick up an investment magazine, and you’re met with forecasts, hot stock picks, and endless commentary about what to buy or sell right now. It creates the impression that investing is a super-complicated, fast-moving game that only a high-paid professional can win.

The reality is, complexity sells. Simplicity doesn’t. If the message were “buy a globally diversified index fund and stay the course,” there wouldn’t be much to talk about in in the 24/7 financial media blitz. And let’s face it: the financial industry has a strong incentive to make investing sound difficult. Because if it’s complicated, you’ll feel like you need someone to do it for you—and that someone can then justify higher fees.

The truth is, while active managers work hard and often mean well, the data shows that the odds are stacked against them—and even more so against the investors paying for those services.

A Little History: Where Did Indexing Come From?

Back in 1976, Vanguard launched the first index fund available to everyday investors (brought to the market by the legendary Jack Bogle himself!). It wasn’t popular at first—Wall Street laughed at the idea of settling for “average” returns. Mr. Bogle tried to raise $150 million in the first offering (the First Index Investment Trust, which later became the Vanguard 500 Index Fund), but ultimately raised just over $11 million (8% of the original target). Wall Street called it, at the time, “Bogle’s Folly”. But the math eventually spoke for itself.

Over the decades, index funds exploded in popularity. Today, they’re not just limited to big U.S. companies—you can invest in indexes tracking everything from emerging markets to clean energy, tech, small companies, or dividend-paying stocks. If there's a theme, there’s probably an index fund for it.

Why Indexing Took Off: Costs Matter

One of the clearest reasons index funds win over time? They’re cheaper.

Active funds often charge higher management fees—sometimes over 1% per year. That may not sound like much, but over decades, that fee can eat away a huge chunk of your investment. Index funds, by contrast, often cost less than 0.1% annually (as an example, check out Vanguard’s VTI ETF, an index that tracks all U.S. stocks, with a fee of 3 basis points at the time this blog was written – with a basis point being one one-hundredth (1/100th) of a percent! That is 0.03%!).

Then there are the hidden costs. Active managers trade more frequently, which means higher transaction fees and a bigger tax bill. Index funds typically buy and hold, which is much more tax-efficient.

Burton Malkiel, Princeton economist and author of A Random Walk Down Wall Street, summed it up perfectly:

“The relentless rules of humble arithmetic make it clear that the average actively managed dollar must underperform the average passively managed dollar.”

What Has History Shown Us?

Let’s talk about performance.

It turns out that most active managers don’t actually beat the market—not just occasionally, but consistently. Over the past 20 years, roughly 85% of large-cap active funds underperformed the S&P 500. And that’s not cherry-picked. The longer the time frame, the worse the performance tends to get.

Even more striking? A study by Professor Hendrik Bessembinder showed that just 4% of all stocks have accounted for nearly all of the stock market’s long-term gains. So unless you—or the fund manager you hire—can identify those rare winners in advance, chances are you'll miss them. And even harder than picking those winners? Picking the person who can pick them… and sticking with them long enough to benefit.

To quote the late, truly great Jack Bogle, “I don’t know anybody who has done it [beat the market] consistently, and I don’t know anybody who knows anybody who has done it consistently.”

This is also why the renowned Charlie Ellis, author of Winning the Loser’s Game, argues that trying to beat the market isn’t just difficult—it’s the wrong game to be playing in the first place:

“The investment management business is built upon a false premise: that talented professionals can produce above-average investment results with enough diligence and hard work. But the data show otherwise.”

Why The Historical Data of Active Management Underperformance Actually Makes Sense

There's a big idea in finance called the Efficient Market Hypothesis, and it helps explain why active management struggles. The idea is that stock prices already reflect all available information. Every earnings report, every news headline, every macro forecast—it’s already baked into the price by millions of investors analyzing the same data.

Regulations like Reg FD (Fair Disclosure) have made sure that companies can’t selectively share information with just big players. That means we’re all playing on a more level field. And with markets becoming more global and real-time every year, that field keeps getting more efficient.

Back in 1973, Burton Malkiel made this case in A Random Walk Down Wall Street. His argument? Trying to beat the market is mostly a random game, and the best strategy is to own the whole thing and stay the course. Fifty years later, the evidence has done nothing but support that view.

From one of my personal favorite quotes of Mr. Bogle: “Don’t look for the needle in the haystack. Just buy the haystack.”

So, What Do You Do With All Of This?

For us (my family), the takeaway is clear. For our retirement funds, we invest in broad, low-cost index funds that give us exposure to the global stock market. We don’t try to guess which country, sector or individual stock will outperform next. We don’t try to time the market. We don’t tinker.

By doing that, we’re aiming to capture the return of the market—and in doing so, history shows that we should outperform the vast majority of other investors over the long term. In fact, studies show that investors who stick to this strategy beat more than 90% of professional and individual investors over time.

And just as important as performance is this: a simple, rules-based approach gives us the behavioral discipline to stay invested when things get tough.

Because things do get tough, and we’ve lived through three such events ourselves already as working adults: the dot-com crash, the financial crisis in 2008, and the early days of the COVID-19 pandemic. And yet, over the long arc of history, the market has always recovered—and gone on to reach new highs.

In case you can’t tell, I (and I venture to say millions of others) have an affinity for Mr. Bogle – and I feel another quote here is so on point:

“Stay the course. No matter what happens, stick to your program. I’ve said ‘stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”

A Quick but Important Note: Not All Indexes Are Created Equal

As index investing has exploded in popularity, so has the number and variety of index funds. You can now buy index funds focused on specific sectors (like technology or healthcare), individual countries or regions, and even trendy themes like clean energy, artificial intelligence, or blockchain.

While these are technically “index funds,” they represent a more narrow, specialized slice of the market—and choosing to invest in them is, in itself, a form of active decision-making.

Why? Because now you’re making a call. You’re deciding that this sector, country, or theme will outperform the broader market. And while these products can offer targeted exposure, they can also bring the same risks and behavior traps as traditional active investing—higher volatility, higher fees, the temptation to chase performance, and just the plain simple fact of history that even the best professional investors can’t pick winners in advance.

As Jack Bogle warned later in life, the rise of narrowly focused ETFs and index products risked turning what was meant to be a long-term, low-cost, buy-and-hold strategy into just another way to speculate:

“The ETF is like a loaded gun. You can use it for protection, or you can use it to kill yourself financially.”

So yes, indexing works—but it works best when you use it to capture the broad market, rather than trying to outguess it through slices.

If the goal is simplicity, low costs, diversification, and behavioral discipline, then a total market or global market cap-weighted index fund is still the most robust, evidence-based way to get there.

Less Tinkering, Better Results

Here’s another behavioral quirk. You might think the more involved you are and the more time you spend in studying the markets and individual companies, the better you’ll do. For any other discipline (more experience and more education), that might be true. But for investing, the opposite tends to be true. People who trade more—especially those who think they’re smarter than the average investor—tend to underperform. A lot.

Meanwhile, investors who buy a target-date fund or a total market index fund and leave it alone, whether purposefully or just due to lack of interest? They often do better, simply because they stay the course.

To quote Charlie Ellis one more time:

“The best way to achieve long-term success is not in outsmarting the market, but in avoiding the big mistakes—and that means embracing simplicity.”

Why We’re Writing This

We’re sharing this because we believe financial literacy is something that should be passed from one generation to the next. It's not something most schools teach—but it has a massive impact on your future (and your children’s and grandchildren’s futures!).

This is part of our family’s commitment to building a foundation of financial education—for ourselves, for our kids (and eventually their kids!), and for anyone who wants to better understand how to invest for the long run.

We follow these principles ourselves. The vast majority of our stock investments, especially in retirement accounts, are in global, low-cost index ETFs. We also have a small tilt toward small-cap and value stocks—but again, all through index funds. No stock picking. No market timing.

We’d Love to Hear From You

If you found this helpful, or if there are other topics you’d like us to cover, let us know. Our goal is to share thoughtful, independent information—hopefully in a way that makes it easier to make confident, informed decisions for your family’s future.

Thanks for reading—and here’s to building wealth the steady, reliable way!