Common Index Fund Myths Debunked

Myth: 'Indexing Only Gets You Average Returns'

This is the most common objection and the most misleading. The word 'average' makes indexing sound mediocre — why settle for average when you could aim higher? The trouble is what 'average' actually means here. An index fund earns the market return minus a tiny fee. Active investors, as a group, also earn the market return — but minus much larger fees and trading costs. So the index's 'average' return reliably beats the average active result after costs.

The data bears this out. S&P's SPIVA scorecards consistently show that over 15-year periods, roughly 90% of active U.S. large-cap funds underperform their benchmark. Earning the index return doesn't put you in the middle of the pack — it puts you ahead of the large majority of professionals who are paid to beat it. 'Average' is a marketing slur, not an accurate description.

Myth: 'You Need a Lot of Money to Start'

Plenty of people delay investing for years because they think index funds require thousands of dollars upfront. That used to have a grain of truth — some Vanguard Admiral mutual funds still carry a $3,000 minimum — but it's now largely obsolete. Index ETFs have no minimum beyond the price of one share, and with fractional shares most major brokers let you start with as little as $1.

Several Fidelity and Schwab index mutual funds also carry a $0 minimum. The practical barrier to starting has essentially disappeared. The amount you start with matters far less than starting at all and contributing consistently — a small automatic monthly investment, sustained for years, builds a real position through compounding.

Myth: 'Index Funds Are a Bubble' and 'They're Too Risky'

Two opposite fears, both overstated. The 'bubble' claim says so much money has flowed into index funds that prices are distorted. But active managers still set prices at the margin through their buying and selling, and passive funds remain a minority of total trading volume even where they're a large share of assets. Indexing hasn't broken price discovery.

The opposite fear — that index funds are dangerously risky — usually confuses the fund with the market. A broad index fund spreads your money across hundreds or thousands of companies, which makes it far less risky than owning a few individual stocks. What you're left holding is ordinary market risk, the same risk every equity investor faces, just diversified and cheap. It isn't risk-free — nothing in stocks is — but it's the opposite of concentrated.

Myth: 'You Lose Control' and 'Active Wins in Downturns'

Some investors worry that indexing means blindly owning 'bad' companies you'd never pick. In practice, trying to exclude the losers is exactly the stock-picking game the SPIVA data says most people lose. Owning everything, including the duds, is what lets the winners — which drive most of the market's long-run return — carry the portfolio.

The other persistent claim is that active managers protect you in crashes by moving to cash or defensive stocks. The evidence is weak: most active funds fail to consistently sidestep downturns, and the ones that go defensive often stay defensive too long and miss the recovery. Across full market cycles, including bear markets, low-cost index funds have held up well against active alternatives. The myths share a root: they assume someone can reliably outguess the market, which decades of data say is far harder than it sounds.

For the deeper case, see our breakdown of passive investing and why it tends to win.