My Shift to Index Funds: A Simpler Path for Retirement Investing

As a financial advisor at JGR Financial Solutions, I have had several conversations lately with people nearing retirement. One question keeps coming up: What is my view on investing in individual stocks, mutual funds, or index funds?

It is a great question, especially if you manage your own investments or currently work with an advisor who uses a different approach.

Many years ago, I was a strong believer in actively managed mutual funds. I felt professional managers could identify opportunities and outperform the market. Over time, however, my views have evolved based on real-world data and what I have seen work best for retirees. Today, I primarily recommend index funds for both stock and bond allocations. They are simpler, lower cost, and, in many cases, more reliable over the long term.

Here is a quick overview of each approach.

Individual Stocks: Picking Your Own Winners

Investing in individual stocks means buying shares of specific companies, such as Apple, Amazon, or Walmart. You are placing a bet on the success of each company.

The appeal is obvious. If you choose well, returns can be strong, and you have full control over what you own.

The downside is risk. If one company struggles, your portfolio can take a significant hit. Building proper diversification requires owning many different stocks, which takes time, research, and ongoing monitoring. Emotional decision-making can also become a problem, especially during market downturns.

For most retirees, this approach creates more complexity and stress than necessary. It may work for some, but it often requires far more involvement than people expect.

Actively Managed Mutual Funds: Paying for Expertise

Actively managed mutual funds pool money from many investors and are managed by professionals who buy and sell investments in an attempt to outperform the market.

The main advantage is convenience. You get professional management and built-in diversification without having to manage individual holdings yourself.

The challenge is cost and performance. These funds often charge annual fees in excess of 1%, which directly reduces your returns. Even more importantly, long-term data shows that most active managers fail to beat their benchmarks.

One of the most widely respected sources on this topic is the S&P SPIVA (S&P Indices Versus Active) Scorecard, which tracks how active funds perform relative to index benchmarks.

You can view the study here:
https://www.spglobal.com/spdji/en/research-insights/spiva/

Over long periods, these reports consistently show that the majority of active managers underperform their index after fees. In other words, most investors are paying more for results that are usually worse.

Index Funds: Owning the Market

Index funds take a different approach. Instead of trying to beat the market, they aim to match it. An index fund simply holds the same investments as a market index, such as the S&P 500, which represents 500 of the largest U.S. companies.

The biggest advantages are low costs, broad diversification, and simplicity. Fees are often under 0.1%, which allows more of your money to stay invested and compound over time. You are not relying on any one manager’s skill. You are simply participating in the overall growth of the market.

The tradeoff is that you will never outperform the index. You will also experience market declines when they occur. However, historically, long-term market growth has been strong, and recoveries have consistently followed downturns.

This approach is not exciting, but it is highly effective, especially for retirees who value consistency and predictability over chasing big wins.

Why I Changed My View

Earlier in my career, I believed good advisors could find good managers. The more data I have reviewed, and the more client outcomes I have seen, the more my philosophy has shifted.

Markets are extremely hard to beat, but very easy to match. Once you factor in fees, taxes, trading costs, and manager turnover, the odds of active strategies outperforming over long periods become quite low.

For retirees, this matters even more. Lower fees compound in your favor. Simpler portfolios are easier to manage and, often times more tax-efficient. And fewer moving parts often mean fewer costly mistakes during emotional markets.

There is no single perfect investment strategy, and different people will always have different preferences. But for most people approaching or already in retirement, I believe a diversified, low-cost portfolio built primarily with index funds offers the highest probability of long-term success with the least complexity.

It is not flashy. It is not exciting. But in retirement, a “boring” investment strategy is often exactly what you want as it allows you to spend your time focusing on higher priorities.

If you’re searching for a fiduciary financial advisor near Canton or Akron, Ohio, and value transparent advice, I’d be happy to have a conversation.