The index approach: buying the whole market

Index investing rests on one observation: the average market participant earns the market return minus costs, so minimising costs is the most reliable way of ending up above average.

What it looks like

You buy a fund replicating a broad index. The portfolio's composition follows the index, and no decisions about individual securities are taken.

What the approach gives

Diversification by construction: an index holds dozens of securities across sectors.

Low costs: a passive fund needs no team of analysts — Active and passive management: what the fee buys.

No decisions: nothing to guess means nothing to get wrong.

What it does not give

Protection from the market falling as a whole. An index portfolio falls with the market by definition.

The chance of beating the market. That is given up deliberately in exchange for reliability of the result.

What to check

Which index the fund actually replicates, how closely, and at what cost — Tracking error: how far a fund trails its index, How to choose a fund: five checks in order.

What to combine it with

Regular purchases — Regular purchases of equal amounts — and rebalancing between asset classes — Rebalancing: returning to the target weights.