Category: Investing Strategies | Reading time: 5 minutes
There is an investing strategy so simple it fits on a single page. It requires no special knowledge, no expensive advice, no daily monitoring of markets, and no ability to predict the future. Yet it has consistently outperformed the vast majority of professional fund managers over the long term.
It’s called index investing. And if you understand nothing else about investing strategies, understanding this one will serve you extremely well.
What Is an Index?
Before we talk about index investing, let’s understand what an index actually is.
A sharemarket index is simply a list of companies grouped together, used to measure the overall performance of a market or segment of a market. You’ve likely heard of some of them:
- The S&P/ASX 200 — the 200 largest companies listed on the Australian Securities Exchange
- The S&P 500 — the 500 largest companies listed in the United States
- The MSCI World Index — a broad measure of global sharemarkets across 23 developed countries
When you hear “the market was up 1.2% today,” they’re usually referring to an index like one of these. The index doesn’t own anything — it’s simply a measurement tool that tracks the collective performance of its members.
What Is Index Investing?
Index investing means buying a fund that is designed to track, or mirror, one of these indices. Instead of a fund manager picking individual stocks in an attempt to beat the market, an index fund simply buys all the stocks in the index — or a representative sample of them — in proportion to their size.
The result is that your investment moves in line with the market itself. If the ASX 200 goes up 10% this year, your index fund goes up approximately 10%. If it falls 15%, your fund falls approximately 15%.
Simple. Transparent. Low cost.
The Man Behind the Revolution — Jack Bogle
To understand why index investing matters, you need to know about Jack Bogle.
In 1974, Bogle founded The Vanguard Group and in 1976 launched the world’s first index mutual fund available to everyday investors — an idea the investment industry at the time dismissed as “Bogle’s Folly.” Why would anyone want average returns, they scoffed, when you could pay a professional to beat the market?
Bogle’s answer was simple and devastating: because after fees, almost nobody actually beats the market consistently over time.
His philosophy — summarised in his book The Little Book of Common Sense Investing — was built on one core principle: own the entire market at the lowest possible cost, and hold it for the long term. He called it a winner’s game turned loser’s game by costs.
Warren Buffett, arguably the world’s greatest investor, said of Bogle: “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack urged investors to invest in ultra-low-cost index funds. He is a hero to them and to me.”
Bogle passed away in January 2019, but his legacy lives in the trillions of dollars now invested in index funds worldwide — and in the lower fees that even active managers have been forced to charge because of the competition he created.
Want to go deeper? Watch Jack Bogle speak about staying the course: https://www.youtube.com/watch?v=MLgn_kVKjCE
Or read his book: The Little Book of Common Sense Investing — available on Amazon and in most bookstores. One of the most important investing books ever written.
Why Active Management Struggles to Win
The investment industry employs some of the brightest minds in the world. They have access to sophisticated research, real-time data, and years of experience. So why can’t most of them beat the market?
The answer comes down to a few brutally honest facts:
The market is the sum of everyone in it. For every buyer who beats the market, there must be a seller who underperforms it. Before costs, active management is a zero-sum game. After costs, it becomes a negative-sum game — and that’s the problem.
Fees compound just like returns do. A fund charging 1.5% per year doesn’t sound like much. But over 30 years, the compounding effect of those fees is enormous.
The chart above illustrates exactly what Bogle was talking about. Two investors put $100,000 into the same market earning 8% per year. One uses an index fund at 0.10% in fees. The other uses an actively managed fund at 1.50% in fees. After 30 years, the difference is over $350,000 — not because the active fund made bad investments, but simply because of the relentless drag of higher fees compounding over time.
The evidence is overwhelming. According to S&P’s SPIVA (S&P Indices Versus Active) report, over 90% of actively managed Australian share funds underperformed their benchmark index over a 15-year period. This isn’t a bad year or two — it’s a consistent, long-term pattern across markets around the world.
What Are ETFs and How Do They Fit In?
You’ll often hear index investing discussed alongside ETFs — Exchange Traded Funds.
An ETF is simply an index fund that trades on the stock exchange like a share. You can buy and sell it through any standard brokerage account throughout the trading day. This makes ETFs extraordinarily accessible — you can invest in the entire Australian sharemarket, or the entire US sharemarket, or global property, or bonds, with a single purchase and minimal fees.
Some of the more popular index ETFs available to Australian investors include:
- VAS (Vanguard Australian Shares Index ETF) — tracks the ASX 300
- VGS (Vanguard MSCI Index International Shares ETF) — tracks global developed markets
- IVV (iShares S&P 500 ETF) — tracks the US S&P 500
- VAF (Vanguard Australian Fixed Interest Index ETF) — tracks Australian bonds
- A200 (BetaShares Australia 200 ETF) – tracks the ASX200
- QUAL (VanEck MSCI International Quality ETF) – MSCI World ex-Australia Quality Index
Management fees on these funds are typically between 0.07% and 0.20% per year — a fraction of what most active funds charge.
The Concept of Staying the Course
Here is where many investors fail — not because they chose the wrong strategy, but because they abandoned the right one at the wrong time.
Markets fall. Sometimes sharply. The GFC saw Australian shares drop more than 50% from peak to trough. COVID sent markets down over 35% in a matter of weeks. These moments feel catastrophic. The instinct to sell and protect what you have is deeply human.
But the Vanguard “Staying the Course” chart (above) tells the story better than words can. Every single market crash in history has eventually been followed by recovery and new highs. The investors who came out ahead were not the ones who timed the market perfectly — they were the ones who did nothing when everything around them said to panic.
Bogle said it best: “Stay the course. No matter what happens, stick to your program. I’ve said ‘stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”
This is the most psychologically demanding part of index investing — and the most important. The strategy is simple. Sticking to it when markets are falling is hard. That’s where discipline separates successful long-term investors from everyone else.
Index Investing Is Not “Set and Forget Forever”
One important clarification. Index investing is sometimes described as completely passive — buy it and never look at it again. That’s not quite right.
You still need to:
- Review your allocation periodically — as you age or your circumstances change, your mix of growth and defensive assets should reflect that
- Rebalance occasionally — if one asset class has grown significantly, your portfolio may drift away from your target allocation
- Add regularly — the most powerful version of index investing combines low-cost funds with consistent, regular contributions over time
None of this requires constant attention. But it does require periodic review — which is exactly what Investor Pilot helps you do. By tracking all your index fund holdings in one place, you can see your total allocation, monitor performance against your goals, and make informed rebalancing decisions without needing to dig through multiple brokerage accounts.
Who Is Index Investing Right For?
The honest answer is: most people, most of the time.
Index investing works best for investors who:
- Have a long time horizon (10 years or more)
- Want to minimise fees and complexity
- Are willing to accept market returns rather than chasing outperformance
- Can maintain discipline during market downturns
It doesn’t require you to abandon all active decisions. Many serious investors use index funds as the core of their portfolio — the foundation that captures broad market returns cheaply — and then make selective active decisions around the edges if they choose to.
But for anyone starting out, or anyone who has been paying high fees in actively managed funds for years, understanding the case for index investing is essential. The evidence is clear, the logic is simple, and the results over time speak for themselves.
As Jack Bogle put it: “The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.”
This article is for educational purposes only and does not constitute financial advice. You should consider your own circumstances and seek professional advice before making investment decisions.
Recommended reading: The Little Book of Common Sense Investing by John C. Bogle (Wiley, updated 10th Anniversary Edition)
Next in the Investing Strategies series: Value Investing — How Warren Buffett Thinks About Buying Stocks
