It’s OK to just be an indexer

When investing in the stock market, you can actively study and select your own investments, such as managed mutual funds and individual stocks. Or you can passively own index mutual funds that simply track the performance of a given index. Or you can do both. Don’t be afraid to simply be an indexfund investor — because that’s all most of us need in order to build wealth, and professional money managers often underperform simple indexes.

Over the 15 years ending in June 2018, about 92 percent of U.S. largecap stock mutual funds lagged the returns of the S&P 500. The pattern holds true for indexes of smaller companies, too. About 95 percent of U.S. mid-cap stock funds trailed the popular S&P MidCap 400 index over those 15 years, while the S&P SmallCap 600 index outperformed nearly 98 percent of all U.S. smallcap funds.

As bad as those numbers are, what’s even worse is that many investors fall short of even the subpar returns their funds produce. That’s because fund investors often jump in after a fund has generated strong performance, and then get out at the worst possible time — during or after a market downturn or a rough period for the fund. Many investors do the same with the individual stocks they invest in, as well.

If you don’t have the discipline to stay the course during bad times and hang on to investments you bought after your research suggested they had strong long-term potential, just stick with one or more index funds. Stay calm as they rise and fall in concert with the overall market, and know that over long periods, the stock market has always gained ground.

With actively managed funds charging much more in fees than many index funds charge, it’s not surprising that most of them fail to match the returns of their index counterparts. Index investing may not seem exciting, but it’s one of the best ways around to build long-term wealth. Consider a low-fee S&P 500 index fund or a total world stock index fund to start.