Winning the Investment Game by Keeping It Simple

How do you get ahead in the world of investing? The answer is surprisingly simple: buy a slice of every business in the United States and then just hold on to it. This straightforward concept is the key to winning a game that most other investors are almost guaranteed to lose. For anyone exploring , it’s important not to mistake simplicity for a lack of sophistication. It’s a principle that has stood the test of time.

Back in the 14th century, the philosopher William of Occam gave us a powerful mental model known as Occam’s razor: when you have multiple solutions to a problem, the simplest one is usually the right one. When it comes to , the simplest solution is to own a total stock market portfolio. This approach to is both elegant and effective.

For decades, the go-to benchmark for the U.S. stock market has been the Standard & Poor’s 500 Index (S&P 500). It’s made up of the 500 largest U.S. corporations, weighted by their market value, and represents about 85% of the entire U.S. stock market. Because it’s weighted by company size, it rebalances itself automatically as stock prices change. This makes it an ideal yardstick for measuring the performance of professional money managers.

The Total Market: A Broader View

In 1970, an even more comprehensive index was created: the Dow Jones Wilshire Total Stock Market Index. It includes all 3,500+ publicly traded stocks in the U.S., including the 500 in the S&P 500. While it contains thousands more companies, the largest 500 still make up the vast majority of its value—about 85%. The remaining 3,000+ smaller companies account for the other 15%.

Given how similar their core holdings are, it’s no surprise that their performance is nearly identical. Looking at data going all the way back to 1926, the returns of the S&P 500 and the Total Stock Market Index move in almost perfect lockstep, with a correlation of 0.99 (where 1.00 is a perfect match). While there are short periods where one might slightly edge out the other, over the long haul, their returns are virtually the same. For most people wondering , the choice between the two is far less important than the decision to use an index-based strategy in the first place.

The Unbeatable Math of Indexing

Here’s a fundamental truth about : the total return of all stocks in the market is, by definition, the same as the total return earned by all investors in that market . Once you factor in fees, commissions, and other expenses—what are known as intermediation costs—the net return for investors as a group be lower than the market’s return.

This simple arithmetic proves that while owning the market is a winner’s game, trying to the market is a loser’s game. A low-cost fund that simply tracks the entire market is mathematically guaranteed to outperform the net returns of the average investor over time. This isn’t just true over years; it’s true every single day. This is one of the most reliable paths for those seeking through long-term wealth building, rather than a traditional job.

The Data Doesn't Lie

The SPIVA (S&P Indices Versus Active) report provides a clear picture of this reality. In its year-end 2016 report, it looked at the previous 15 years and found that a staggering 90% of actively managed mutual funds failed to beat their own benchmark indexes. Whether you look at large, mid-size, or small companies, the story is the same: indexing wins with overwhelming consistency. Effective doesn't require outsmarting the market; it just requires owning it.

Consider this real-world example. An investor who put $15,000 into the very first index fund—the Vanguard 500 Index Fund—at its launch in 1976 would have had that investment grow to $913,340 by 2016. These kinds of returns from show the power of compounding and low-cost ownership. It's a testament to the idea that sometimes the best move is no move at all.

Of course, a couple of warnings are in order. First, of the 360 actively managed funds that existed in 1976, only 74 were still around 40 years later. Active funds come and go, but an index fund is designed to last forever. Second, the 10.9% annual return seen over that period was exceptional. It would be foolish to assume those exact returns will repeat over the next 40 years.

This simple strategy of isn't just for everyday people. It's endorsed by giants in the field. David Swensen, the acclaimed chief investment officer for Yale’s endowment, has highlighted the massive underperformance of active funds. Warren Buffett famously directed that his wife’s trust be invested primarily in a low-cost S&P 500 index fund. Even the largest retirement plan in the country, the federal Thrift Savings Plan, is built around indexing. The goal is to and wealth over a lifetime, a strategy that has proven to be one of the most effective ways to build substantial wealth.

Instead of getting caught up in complex strategies to pick stocks or chase past performance, the solution is much simpler. You can and build wealth by choosing the most straightforward option: buying and holding a diversified, low-cost portfolio that tracks the stock market.