Index funds are the most boring investment vehicle ever invented, and they consistently outperform the most exciting ones over long periods. Here is why, and how to use them.
What an Index Fund Is
An index fund tracks a defined basket of securities — the S&P 500, the total US stock market, a global bond index. It is not trying to "beat" anything. It owns everything in the index in proportion, charges almost nothing, and earns whatever that market segment earned.
Why They Win
SPIVA's annual research consistently shows that over 15-year periods, more than 85% of active US-equity funds underperform their benchmark index after fees. Lower costs compound just like returns — except in your favor.
A Three-Fund Portfolio
The most popular index portfolio holds: a US total-market fund, an international total-market fund, and a US bond fund. Pick weights based on your age and risk tolerance. That's the entire decision.
How Much to Hold in Each
Common starting points:
- 20s–30s: 80–90% stocks, 10–20% bonds
- 40s: 70/30
- 50s: 60/40
- 60s+: 50/50 or more conservative
Within stocks, US vs international is typically 70/30.
Costs to Watch
The Vanguard, Fidelity and Schwab broad-market index funds charge between 0.00% and 0.04%. Anything above 0.20% should make you skeptical.
Bottom Line
Pick three low-cost index funds, set automatic monthly contributions through a DRIP-enabled brokerage account, rebalance once a year using our Portfolio Rebalancing Calculator, and let time do the work.
Run the numbers yourself
Plug your own inputs into our free calculators — no signup.