For as long as I can recall, telling people to put their 401(k) in an index fund was considered the soundest investment advice you could give. Most of us lack the skill—and the stomach—to make money by choosing individual stocks. But an S&P 500 index fund generates returns (less exceptionally low fees) that mirror the stock market as a whole, removing the need for people to become stock-pickers. To quote the late Jack Bogle, who created the first index fund for individual investors: “Don’t look for the needle in the haystack. Just buy the haystack!”
Over the years, the message has gotten through: As of the end of last year, index funds and exchange traded index funds held a combined $30 trillion. Stock picking has become extinct, almost. Since 2000, the S&P 500—the most commonly used index among fund companies like Fidelity and Vanguard—has gained over 630 percent.
The trouble is that Bogle’s original premise no longer holds: Index funds have stopped being a proxy for the entire market.
