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Sound Advice: October 1, 2025

Is a total market index fund a better choice than a broad portfolio of stocks? 

A total market index fund is generally considered a better choice for most investors compared to attempting to assemble a broad portfolio of individual stocks, primarily due to superior diversification, lower costs, and simplicity. Total market index funds provide exposure to essentially all publicly traded stocks in a market (such as the entire U.S. stock market), including large-cap, mid-cap, and small-cap companies, thus reducing company-specific risk and the need for individual stock-picking skills.

Key benefits of total market index funds:

  • Diversification: One fund can offer broad market exposure across thousands of companies and all major economic sectors, lowering the impact of poor performance from any single stock or sector.
  • Low Cost: These funds typically have very low management fees (expense ratios), which helps investors keep more of their returns over the long term.
  • Simplicity: Investing in a total market index fund eliminates the need for constant research, stock selection, and portfolio rebalancing. The fund automatically maintains market-cap weighting and composition.
  • Consistent Market Returns: Total market index funds are designed to capture the long-term returns of the entire market, which historically have been robust for patient investors.
  • Reduced Risk of Major Underperformance: By avoiding concentrated bets on individual stocks or sectors, you reduce the risk of significant losses that can occur with less diversified portfolios.

Considerations:

  • Limited Outperformance: Total market funds will not outperform the overall market and may underperform if compared to a narrowly focused portfolio in short periods of time. Still, consistently picking these winners in advance is extremely difficult even for professionals.  If odds could be given, it’s likely that a total market index fund will be among the best performers over extended periods.  Indeed, few professionals will come even close, and at noticeably higher cost.
  • Exposure Still Favors Large Caps: Even total market funds are weighted by market capitalization, so large-cap stocks (often 70-80% of the U.S. market) dominate fund performance. In addition, you gain exposure to mid- and small-cap firms, offering additional growth potential and diversification.

When might building a broad individual portfolio be preferable?

  • If you have exceptional stock-picking skills, significant resources, and the time to manage and monitor a large portfolio, you could potentially outperform the market. That said, research indicates almost all individual and professional investors underperform low-cost index funds over time.

In summary, for the vast majority of investors—including those seeking long-term growth, low maintenance, and broad diversification—a total market index fund is a highly effective and efficient investment vehicle.

N. Russell Wayne

Weston, CT  06883

203-895-8877

www.soundasset.blogspot.com

 

 

 

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