October 16, 2026

Why Index Funds Are the Only Choice for Stock Investing | The Conclusion of 'Dream Team' Investing Reached After 15 Years of Practice

There are various investment methods in stock investing, such as day trading, swing trading, and investing in individual stocks. I started stock investing about 15 years ago and have practiced all of these methods myself.

The conclusion I reached as a result is investing in ‘long-term, diversified, low-cost’ index funds. Currently, I only continue with index investing, and I believe that is sufficient.

So, why are index funds the only choice for stock investing? And why are index funds called a ‘dream team’? I will explain the reasons while also introducing data from classic books.

Three Merits of Index Investing

The excellent merits of index funds can be summarized in the following three points.

1. Relatively High Returns

In the long term, more than 80% of active funds underperform the results of index funds that track market averages. The ‘SPIVA Report’ published by S&P Dow Jones Indices also consistently shows that about 90% of U.S. large-cap stock funds lose to the index (S&P 500) over a 15- to 20-year period.

It can be said that it is almost impossible to identify the top 10-20% of managers who will win in advance.

2. Low Cost

Index funds are structured to keep costs low in every aspect.

Management and administrative fees: While the trust fees for active funds are around 1-2% per year, index funds are kept to around 0.1% per year, or even lower in some cases.
Trading commissions: Active funds have frequent portfolio turnover, and it is not uncommon for a fund to replace most of its portfolio within a year. Index funds have a low turnover rate because they are limited to when the index’s constituent stocks change, so the commissions are lower accordingly.
Suppression of market impact: You can reduce the influence of ‘market impact,’ where prices move due to your own large-scale buying and selling.
Tax aspects: Because there is little trading and little realized profit each year, you can defer the timing of taxation and easily suppress the tax burden. In Japan, if you utilize NISA, the investment gains themselves become tax-free.

3. Convenience and Mental Stability

Index funds require almost no detailed management of investment performance. Judgments such as checking market trends, formulating investment strategies, and selecting fund managers are unnecessary. Furthermore, because the investment ratio in specific individual stocks is low, the worry of making a fatal mistake due to corporate bankruptcy is also reduced.

In this way, I believe the great appeal of index funds is that you can focus solely on the truly important issues, such as your investment objectives and long-term investment policy without feeling anxiety or regret.

The Disadvantage of Index Funds is That It ‘Takes Time’

Personally, I believe there are almost no disadvantages to index funds. If I had to name one, it would be that ‘it takes time for assets to grow’.

Whether through monthly accumulation or lump-sum investment, if your initial capital is small, it takes time for your assets to grow significantly through investment alone.

However, this is more of an issue related to the size of the investment principal than a disadvantage of index funds themselves. Therefore, I do not consider it a weakness of choosing index funds per se.

Index funds are a ‘Dream Team’

In his book ‘Winning the Loser’s Game,’ Charles Ellis compares index funds to an ‘investment dream team.’

An index fund is, so to speak, like having an entire investment dream team at your disposal. If you were to choose the members of this dream team, the lineup would look like this:

Warren Buffett
Charlie Munger
Peter Lynch
Fidelity’s fund manager team
Analysts from Merrill Lynch, Goldman Sachs, and Morgan Stanley
All analysts from Credit Suisse and UBS

Suppose this dream became a reality and the world’s top professionals became your staff. You would only need to silently accept the advice of your staff.

For example, when we board an airplane, we trust that the pilot has received sufficient training and sit in our seats with peace of mind. It is the same thing.

An index fund is precisely a compilation of the investment decisions of these top professionals. Market prices are determined as a result of the daily buying and selling by these professionals. Because an index fund replicates that market exactly, you not only gain the same benefits as having a dream team staff but also obtain the significant benefit of peace of mind.

The enormous annual costs of active management

The same book, ‘Winning the Loser’s Game,’ points out the high costs associated with active management. It states that just for the buying and selling of Fortune 500 stocks, there is a commission of 6 cents per share, with a total of over $40 billion spent annually across the United States.

Other expenses are also enormous.

Commissions and management costs, etc.: $35 billion
Various expenses such as futures and options: $25 billion

Adding these together, it is calculated that over $100 billion annually is spent in expenses across the United States. This is an amount equivalent to 1% of the market capitalization of the Fortune 500 companies (approximately $10 trillion).

The total profit of the Fortune 500 companies at that time was $334 billion. Since the ratio of profit to the $10 trillion market capitalization is about 3.3%, if you subtract the 1% cost from that, the actual return remaining for investors does not even reach 2.5%.

Furthermore, one of the major factors cited for dragging down individual investor returns is taxes. Because capital gains are taxed every time stocks are bought and sold, the more frequent the trading, the higher the effective tax rate, which ultimately lowers returns.

Costs continue to accrue forever

In his book ‘Winning the Loser’s Game,’ John Bogle states the following regarding the importance of costs:

When the market return is 7%, the total return obtained by all investors combined is also 7%. However, what investors actually get to keep is only the remainder after costs are deducted.

Investors can only receive what remains after paying fees to all financial intermediaries, such as brokerage commissions, purchase fees, advertising expenses, management costs, and legal fees. And costs are something that must be paid regardless of whether returns are positive or negative.

Comparing the relationship between market average returns and costs looks like this:

Market average 7%, cost 0.1% (Index Fund): The return the investor receives is 6.9%
Market average 7%, cost 1% (Active Fund): The return the investor receives is 6%

In other words, the return an investor receives is guaranteed to be lower by the amount of the costs. This difference accumulates every year and, because it works through compound interest, it manifests as a significant gap over long periods of 20 or 30 years.

It is ‘costs’ that create the difference in returns

Let’s look at the comparison of returns and costs between S&P 500 index funds and active funds from 1991 to 2016, as introduced in ‘Winning the Loser’s Game’.

1. S&P 500 Index Fund

2. Active funds in the lowest-cost group

3. Active funds in the highest-cost group

Looking only at the total return before deducting costs, active funds appear to perform better. However, once you subtract costs and account for the level of risk taken, the rankings reverse, and index funds yield the highest results.

In other words, the difference in the final returns that funds provide to investors is created by the ‘costs’.

Why active funds cannot beat index funds

In their book ‘The Elements of Investing,’ Charles Ellis and Burton Malkiel clearly explain why active funds cannot beat the market in the long term.

Every issued share is held by someone. Currently, professional investment managers account for over 90% of market transactions, but the ultimate owners of the stocks bought through them are retirement plans like pension funds and 401ks, or in Japan, individual investors saving through NISA or iDeCo.

Professional managers cannot beat the market average in the long run. This is because they themselves are the ‘market’.

When investors try to earn returns in the market, the result is a ‘zero-sum game’ when compared to the market average. The total excess profits of winning investors are equal to the total losses of losing investors. Even if one investor is lucky enough to hold only stocks that have risen in value, behind that, someone else is holding stocks that have fallen. It is structurally impossible for everyone to achieve above-average performance.

So, why do investment professionals lose to the market average? In fact, before deducting expenses, professionals also achieve performance roughly equal to the market average.

However, costs are incurred in the actual management process.

Active funds: Approximately 1% annually as management fees (trust fees)
Low-cost index funds: Approximately 0.1%, which is one-tenth of that

That is why active funds cannot beat index funds by exactly this ‘difference in costs’.

Index funds do not become worthless due to the bankruptcy of a single company

For example, in the case of All Country (All Country World Equity), investments are diversified across about 47 countries and approximately 2,500 stocks. On the other hand, investing in individual stocks means concentrating funds in one company.

Single-company concentrated investment might look attractive in terms of dividends and the like. However, if that one company goes bankrupt, the stock becomes worthless. Also, it is very difficult to determine whether the same company will continue to grow for 20 or 30 years. Having to keep believing in that company forever is also a very high hurdle mentally.

I myself have had the experience of dabbling in individual stocks, seeing the stock price plummet, and suffering losses. I have also had stocks I held fall into the crisis of delisting and nearly become worthless.

While the method of increasing assets through single-company concentration might be one option, I believe that diversified investment is still necessary if you are going to invest for the long term, such as 20 or 30 years.

The story of a secretary who worked at Enron

When discussing the risks of concentrating investments in a single company, the case of the American energy firm Enron is often cited.

Enron provided a retirement savings plan called a ‘401k’ for its employees. A woman who worked there as a secretary also used this plan to invest, but the content of her investment was purchasing company stock.

She chose a plan to invest all of her retirement savings into Enron stock. While her salary was not much different from that of a typical secretary, the rise in Enron’s stock price meant her accumulated retirement savings had reached $3 million. She reportedly dreamed of using her free time to travel the world starting the year after she retired.

However, Enron’s performance was built on accounting fraud and illicit transactions. The company went bankrupt in 2001, the management was indicted, and the stock price plummeted. In an instant, her retirement savings became worth almost nothing.

Investing in a single company means always carrying this kind of risk and nothing else.

Only 4% of companies have created wealth

In Nick Maggiulli’s book ‘JUST KEEP BUYING,’ the research of economist Hendrik Bessembinder is introduced. In a paper titled ‘Do Stocks Outperform Treasury Bills?’, Bessembinder points out that the wealth generated by the entire U.S. stock market since 1926 was due to the top 4% of listed companies with the best performance.

In other words, between 1926 and 2016, only 4% of stocks effectively generated excess returns that outperformed U.S. short-term Treasury bills. In fact, just five companies—ExxonMobil, Apple, Microsoft, General Electric, and IBM account for about 10% of all wealth creation.

Do you have the confidence to pick these 4% of stocks and avoid the remaining 96%?

Moreover, even these excellent companies will eventually decline. According to calculations by physicist Geoffrey West, out of 28,853 companies traded on the U.S. stock market since 1950, 22,469 companies (78%) had disappeared by 2009.

Furthermore, there is data showing that no matter which point you choose to look at, half of U.S. listed companies disappear within about 10 years. Even regarding the Dow Jones Industrial Average, not a single company remains from those originally included when the index began, following the removal of General Electric in 2018.

With individual stocks, you have to guess the 4% that will survive, but with an index fund, you are automatically including that 4% from the start.

When to invest: The answer is ‘as soon as possible’

In ‘JUST KEEP BUYING,’ it is stated as follows:

Most markets rise most of the time.

From the 20th century to the present, the U.S. has experienced several costly wars, including two world wars. There have also been the Great Depression, over a dozen recessions, financial crises, oil shocks, the Spanish flu and COVID-19 pandemics, and even the resignation of a president due to scandal. Yet, the stock market has continued to rise over the long term.

This trend is not limited to the U.S. market; stock markets around the world generally show a positive trend over the long term.

What we can conclude from this is that we should invest as soon as possible. If most markets rise most of the time, the longer you delay investing, the higher the price you will have to pay when you finally do invest.

Simulation: Twin brothers William and James

‘The Elements of Investing’ introduces a simulation that demonstrates the importance of when to start investing. It tells the story of twin brothers, William and James, who are now 65 years old.

William (Started at age 20)

45 years ago, at age 20, he started investing for his retirement
He invested $4,000 in stocks every year, and after investing a total of $80,000 over 20 years, he stopped making new contributions
After that, he continued to reinvest the returns earned in the account

James (Started at age 40)

He started investing at age 40, exactly when William stopped making contributions
He continued to invest $4,000 every year for 25 years, for a total investment of $100,000

Both are assumed to have an average annual return of 10%, and it is assumed that there are no taxes on retirement funds.

When these brothers reached age 65, who had built more wealth?

William’s assets: approximately $2.5 million
James’s assets: less than $400,000

The result is a landslide victory for William. Even though the amount William actually invested was $20,000 less, he was ultimately able to build about $2 million more in assets.

The lesson is clear: if you start while you are young, you can take full advantage of the power of compound interest, and your assets will grow significantly.

The ‘Time You Start’ Is More Important Than ‘Timing’

Let’s look at another case.

One person started investing while young, but unfortunately bought stocks at the annual high every year. Another person started investing a bit later in life, but was able to buy stocks at the annual low every year.

However, the result was that the former, who invested less in total and had the worst timing for buying, was able to build more assets than the latter.

Investment timing is important, but what is even more important is the time horizon of ‘when you start investing’.

If you look for them, you can find endless excuses for not being able to save money for retirement. However, making time your ally is the shortest path to steadily increasing your assets.

Even God cannot beat ‘Dollar Cost Averaging’

‘JUST KEEP BUYING’ also introduces a comparison between dollar cost averaging and ‘buying the dip’.

Let’s assume you invest in US stocks for 40 years, starting at any point between 1920 and 1980. You must choose one of the following two investment methods.

① Dollar Cost Averaging: Invest $100 every month for 40 years, consistently
② Buy the Dip: Save $100 in cash every month and buy only when the market falls

Here, we will set even more favorable conditions for ② Buy the Dip. Assume you are ‘omniscient’ and know in advance when the bottom will come. In other words, you can perfectly predict the exact bottom between one peak and the next, and you are guaranteed to buy at that point. However, there is a rule that ‘you cannot sell stocks once you have bought them,’ and you must hold them until the end of the period.

Which one would you choose?

Normally, it would seem that ②, which allows you to always buy at the bottom, could not possibly lose. However, when you actually calculate it, ② underperforms ① Dollar Cost Averaging in over 70% of cases over a 40-year investment period. This means that even a ‘God’ who knows exactly when the market will bottom out cannot beat dollar cost averaging.

Why even God cannot win

② only works if you know in advance that a serious decline is coming and can predict it perfectly. The problem is that major crashes rarely happen. In the history of the US stock market, serious crashes have only occurred during limited periods such as the 1930s, 1970s, and 2000s.

In other words, there are very few chances for ② to beat ①. And to seize those few chances, god-like perfect prediction is required. If the prediction of the bottom is off by just two months, the probability of ② outperforming ① plummets from about 30% to about 3%.

While you are holding cash waiting for a crash, the market continues to rise. The cost of missing out on that rise outweighs the benefits of buying the dip.

Which is more advantageous: ‘Decline Avoidance Strategy’ or ‘Buy and Hold’?

‘JUST KEEP BUYING’ also covers a comparison between a strategy of avoiding declines and a strategy of simply holding on.

If you knew how much the stock price would fall the following year, would you stop investing in stocks and switch to bond investments? If you were told in advance that it would ‘fall by 40%,’ would you continue investing in stocks? Or would you switch to bonds? What if the decline rate was 20%?

First, let’s look at the data.

Since 1950, the maximum annual decline rate of the S&P 500 has been an average of 13.7% and a median of 10.6%
If you bought the S&P 500 on January 2nd of any year since 1950, the probability of it falling by 10% or more within that year is about 50%
The largest decline was in 2008, at about 48%

Here, let’s consider a ‘decline avoidance strategy.’ This is a strategy of avoiding stocks if you know that the maximum decline rate for that year will be 5% or more.

Every year, you would hold all your assets in either bonds or stocks.

If you had continued to invest $1 every year from 1950 to 2020 based on this drawdown avoidance strategy, you would have missed out on a significant portion of the returns you otherwise would have earned. Compared to a ‘buy and hold’ strategy where you stay invested without ever exiting the market, the final assets would be about 90% less—that is the result shown.

The reason for this is that the periods spent out of the market are too long. A decline of around 5% occurs in many years, but even in those years, stock prices often end up rising by the end. If you try to avoid the declines, you end up giving up the benefits of those gains as well.

The returns investors actually receive are lower than the market average

Rakuten Securities’ commentary introduces the fact that while the average return of stock funds actually earned by investors over the past 10 years was 4.23%, the return of the S&P 500 was 7.31%.

Normally, if you had held index funds for 10 years, you should have been able to earn a return close to the 7.31% market average. The reason for the discrepancy despite this is thought to be due to the following behaviors:

Switching funds along the way
Selling out of anxiety during a downturn
Taking profits and closing positions when prices rise

It is an ironic result where, although you should have just held on without doing anything, adding unnecessary actions ended up dragging down your returns.

In fact, data shows that the average holding period for investment trusts in Japan is generally around 2 to 4 years. Although the importance of long-term investment has become widely known, isn’t there a reality where actually continuing it is not easy?

The reason I choose index funds

The data I have introduced so far all point to the superiority of index funds. And for me, the biggest factor is that there is almost no worry that my assets will become worthless due to the bankruptcy of a single company.

The precious assets I accumulate every month are funds I intend to use for education or retirement. If I were investing in a company that would decline in 20 or 30 years, I would have to replace the stocks myself. With an index fund, stocks are automatically replaced through index rebalancing, resulting in a portfolio of companies that are always generating profits for that era. By just holding onto them, I don’t have to do anything at all.

Therefore, the time I spend managing my stock investments is less than a minute a year. It is because I know that ‘doing nothing’ is the best action. Investing in index funds is what makes that possible, and it is also the reason why I can expect higher returns than many traders who repeat short-term buying and selling.

For the reasons above, I believe that sticking exclusively to index funds is sufficient. I feel no need to dabble in individual stocks, and I have no interest in shareholder perks or stories about ‘assets increasing tenfold in a short period.’ Having experienced various methods myself and repeated many failures, this index investment is the conclusion I finally reached.

Why Index Funds Are the Only Choice for Stock Investing | The Conclusion of &#039;Dream Team&#039; Investing Reached After 15 Years of Practice