The Simple Math of Successful Stock Market Investing

After stripping away all the noise, a few simple truths about emerge. We know that chasing funds with a hot track record is a losing game. We’ve seen that even the best advice only works some of the time, and we know that high costs are a guaranteed drag on your returns.

So, if keeping costs low is one of the only things we can control, it makes sense to lean into it. This is where the conversation about pivots to the simplest, lowest-cost option available: traditional index funds that own the entire market. The best of these funds have annual expenses as low as 0.04%, which is practically nothing. That’s a 96% discount compared to even the cheapest quartile of actively managed funds.

This isn’t just a theory; it’s a strategy with a proven history of success. The S&P 500 Index fund has consistently outperformed the average equity fund for decades. And while the past can’t predict the future, we can use statistical models to get a pretty good idea of the odds.

What Are the Odds You Can Beat the Market?

A there’s a complex statistical tool called a “Monte Carlo simulation” that projects the probability of an actively managed fund beating a passive index fund over time. Let’s make the assumptions generous for active managers: we’ll say the index fund costs 0.25% per year (you can find them for much less) and the actively managed fund costs 2% all-in (many cost more).

Here’s what the simulation shows:

, about 29% of active managers are expected to beat the index.
, that number drops to just 15%.
, a tiny 2% are projected to come out ahead.

These numbers seem to be in the right ballpark. A real-world look back from 1970 showed that out of 355 funds, only two managed to outperform the by 2% or more per year. This mathematical reality is why an index fund should be a cornerstone of your portfolio. In an era where returns are expected to be more modest, minimizing costs becomes more critical than ever for generating long-term . This approach to focuses on the simple elegance of low-cost ownership.

Warning: Not All Index Funds Are Created Equal

This is a critical point for anyone learning . Just because two funds track the same index, like the S&P 500, doesn’t mean they are the same. Their costs can be wildly different. Some charge minuscule expense ratios, while others are shockingly high. Worse, nearly a third of them hit you with a substantial sales charge, known as a front-end load, just for the privilege of investing.

The gap is staggering. A look at ten major fund providers shows a difference of over 1.3% in annual expenses between the low-cost and high-cost S&P 500 index funds. Even a seemingly small difference adds up. If you invest $10,000 for 25 years at a 6% return, a fund charging 0.25% grows to $40,458. A truly low-cost fund at 0.04% grows to $42,516—an extra $2,058 in your pocket.

To see this in action, look at the first index fund ever created, the Vanguard 500, and compare it to the Wells Fargo Equity Index Fund, which appeared nine years later. Both track the S&P 500.

The Vanguard fund has no sales charge and an expense ratio of 0.04% for many investors.
The Wells Fargo fund had a 5.5% sales charge and an average expense ratio of 0.80%.

From the very start, the Wells Fargo fund was fighting an uphill battle. Over 33 years, that initial $10,000 investment grew to $294,900 in the Vanguard fund. In the Wells Fargo fund, it grew to just $232,100. When asked years ago how the firm could justify such high charges, a representative reportedly said, “You don’t understand. It’s our cash cow.” Your index fund should be your cash cow, not your fund manager’s.

Indexing Works Everywhere, So Don’t Get Fancy

Some argue that while indexing makes sense for large U.S. stocks, active managers have an edge in less “efficient” areas like small-cap or international markets. The data shows this is false. Indexing works just as well wherever it’s been tried. S&P data reveals that over the last 15 years, its international index beat 89% of active international funds, and its emerging markets index beat 90% of active emerging market funds.

The logic is simple: in any market, all investors as a group the average. For every manager who has an oversized win, another has an oversized loss. After costs, the group as a whole has to underperform the market.

This leads to a final word of caution: avoid the temptation to bet on individual market sectors. Using index funds to invest in, say, only tech or healthcare stocks, is just gambling. It’s a game driven by emotion, where investors pile into whatever has been popular recently—a proven recipe for failure. The ultimate strategy, marked by mathematical certainty, is to own the whole market at the lowest possible cost. This is one of those rare over decades, not days.

As investor Charlie Munger points out, the financial industry often pushes complexity with layers of consultants and managers, all of which adds up to enormous costs. His advice? Dispense with the complexity and simply invest in a low-cost index fund. It’s the wisest choice.