Should investors keep funneling their savings into index funds, or is it time to explore smarter alternatives?
What is an index fund and why have they been the investment of choice for many?
Index funds aim to replicate the performance of a specific market index, such as the S&P 500, Nasdaq 100, or the Dow.
Lets take VOO, the Vanguard ETF which tracks the S&P 500, for example. Vanguard buys shares of all (or a representative sample) of the 500 largest U.S. companies in roughly the same proportions as the index. Since Apple makes up about 7% of the S&P 500, then 7% of an investor's money in Vanguard's fund goes into Apple.
What are the benefits of index funds?
Index funds have a wide range of benefits which make it understandable why trillions of dollars are held in them.
Index funds have low fees since they're passively managed, meaning there’s no expensive team of analysts trading stocks.
They also offer consistent market performance. Most actively managed funds don't even outperform the market over long periods.
One of the most attractive parts of investing in an index fund is its simplicity. Investors can simply buy, hold, and buy more for decades without having to do much work at all.
Chart of the S&P 500: 1998-2025
Why reinvent the wheel?
Though index funds remain a fantastic investment for most, lets take a look at a simple strategy that can increase investor returns at limited risk.
Ex: Google
Since the Covid-19 pandemic, Google stock (GOOG) has soared over 400%, reaching all time highs of almost $260.
Now, of course, we must look at what happened during the market downturn during 2022 and during the most recent collapse in April.
Google shed nearly 45% during the bear market in 2022 and around 30% in response to President Trump's tariffs.
In the same time periods, the S&P 500 fell 28% and 22%, respectively.
The Strategy
Individual stocks typically outperform indexes in a bull market and vice versa in a bear market; this is nothing new. However, bear markets provide extraordinary buying opportunities for companies like Google. This is what most people miss by investing strictly in safe assets since the once the bull market returns, strong individual stocks almost always vastly outperform indexes.
Investors should allocate enough capital to stable assets like U.S. government bonds, commodities, and index funds to stay secure, while using the remainder to pursue higher returns through quality stocks.
By having enough money in secure assets, investors have the freedom to purchase high quality companies that are either struggling or undervalued based on their P/E ratio. Though this takes more effort and more time than simply throwing money into an index fund and forgetting about it, the difference in returns is significant.
A recent example:
UnitedHealth Group (UNH)
UnitedHealth Group took a profound hit, shedding nearly 60% from April to July, due to weak guidance, leadership uncertainty, and legal issues. Despite all of these concerns however, UnitedHealth remained the clear #1 healthcare provider in the United States, generating almost $400 billion in revenue for FY 2024.
It is impossible to pick the exact bottom but by dollar cost averaging, starting in June and ending in August, I have been able to gain around a 40% return in the same time the S&P 500 has climbed 12%.
Conclusion
While index funds like VOO have proven to be some of the most reliable and efficient ways to build long-term wealth, they aren’t the only option for investors to maximize returns. The greatest ROI often comes from taking advantage of market dislocations and buying strong, fundamentally sound companies when retail fear drives prices down.
By keeping a foundation in stable assets such as government bonds, commodities, and index funds, investors can manage risk while maintaining the flexibility to capitalize on high-quality stocks during market downturns.
Though index funds remain the centerpiece of smart investing, the future belongs to those who combine stability with selective opportunity.