Investing in the stock market can be filled with drama: Stocks can soar one day then crash the next, and economic data or industry news can send a whole sector of the market up or down. But investors who embrace boring strategies that minimize rollercoaster-like movements in their portfolios are often the ones who stay on track to meet their financial goals.
Investing in index funds — funds that track a market benchmark such as the S&P 500 — may not have the same appeal as pouring money into a flashy stock, but it can generate higher returns.
The pros of index funds
Morningstar found that between July 2024 and June 2025, only 33% of active mutual funds and exchange-traded funds (ETFs) in the U.S. beat their passive counterparts. Here are three reasons passive index funds make sense for investors.
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Index funds come with low costs
Index funds don’t have active portfolio managers choosing which stocks are added and removed in the same way their active counterparts do. Instead, these funds aim to mirror a broad market index and rebalance the portfolio periodically based on changes to the underlying benchmark. That means they are able to offer much lower expense ratios than actively-managed funds.
In 2023 and 2024 the average expense ratio of active funds was 0.59% compared to a 0.11% average for passive funds, according to Morningstar. An expense ratio around 0.5% may seem small but over time, those costs will eat away at your returns. You can find plenty of index funds with expense ratios below 0.10%.
They minimize taxes
Since index funds are passively managed, there aren’t as many transactions taking place as with actively-managed funds. Each time an active portfolio manager sells equities, it can trigger a taxable event and result in taxable gains tax. However, since index funds are passive, they have lower turnover and don’t incur as many capital gains.
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They allow for a hands-off approach
Investors make some of their biggest mistakes when they get wrapped up in emotions and stay on top of financial news. Index fund investing reduces this risk, since it allows you to buy shares of a fund that is well-diversified and hold it for the long term.
Boring investors can easily stay the course, while active investors can more easily get rattled by short-term economic roadblocks and headlines. But keep in mind it’s important to regularly check in on your portfolio — like once a quarter or year — to make sure your asset allocation still aligns with your goals, time horizon and risk tolerance.
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Why a ‘boring’ portfolio can win
While some people may have the time and expertise to search for individual stocks that will soon soar, choosing the right stocks is challenging even for the professionals on Wall Street. For most investors, it makes more sense to stick with low-cost index funds.
Common benchmarks like the S&P 500 and Nasdaq Composite are good starting points when you’re looking at index funds, but they only invest in U.S. companies. It’s smart to diversify into international index funds that offer exposure to non-U.S. companies. That way, if the U.S. endures macroeconomic setbacks that don’t affect other parts of the world, you can end up mitigating potential losses.
You may miss out on huge returns from stocks that soar, but depending on the index funds you’re invested in, you’ll still benefit from market trends such as technology stocks skyrocketing. Boring investing can win out in the long run and make financial markets more accessible to everyday individuals who don’t want to know about the intricacies of stock analysis.
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