Investing can feel overwhelming. With countless funds, strategies, market forecasts, and opinions competing for attention, it’s easy to assume that successful investing requires constant analysis and a complicated portfolio.
But it doesn’t have to.
For decades, Sound Mind Investing has offered an indexing strategy called Just-the-Basics, designed around simplicity, diversification, and minimal maintenance. According to Mark Biller, Executive Editor and Senior Portfolio Manager at Sound Mind Investing, a straightforward indexing approach can also work alongside more active investment strategies.
The key may not be choosing between active investing and indexing, but understanding how both can fit in a well-designed portfolio.
How Index Investing Works
Index investing begins with a simple idea: rather than trying to beat the market, investors seek to earn approximately the market’s return.
They typically accomplish this through low-cost index funds that track a particular market benchmark. Because these funds generally require less active management, their expenses tend to be lower than those of actively managed funds.
Over time, those lower costs can be significant. “Indexing is based on the idea that an investor is going to give up trying to beat the market in favor of just earning the market’s return,” Biller explains.
Sound Mind Investing’s Just-the-Basics strategy takes that concept and keeps it intentionally simple. It uses three stock index funds and, when appropriate for the investor’s asset allocation, a bond index fund.
Once established, the strategy requires relatively little maintenance—typically an annual portfolio rebalance. That simplicity can make indexing especially appealing to investors who don’t want to continually monitor markets or make frequent investment decisions.
Active Investing or Indexing? Why Not Both?
Investors sometimes treat active management and indexing as competing philosophies. Either you try to outperform the market, or you simply track it.
SMI takes a different approach. Although the organization may be better known for its active strategies, Just-the-Basics was actually the first investing strategy introduced in the SMI newsletter more than three decades ago.
Rather than viewing active investing and indexing as an either-or decision, Biller suggests thinking in terms of both-and.
That approach can be particularly useful for investors whose workplace retirement plans offer mostly index funds. For example, an investor might use low-cost index funds inside a 401(k) while employing active strategies elsewhere in the portfolio.
Combining the two can create another layer of diversification without requiring every investment account to follow the same approach.
Why Use More Than One Stock Index Fund?
If simplicity is the goal, why not simply purchase a total stock market index fund?
That would certainly be easy. But SMI has historically used three separate stock index funds instead. There are practical reasons for that.
When Just-the-Basics was first introduced, total stock market index funds were not yet widely available. More importantly, many workplace retirement plans still do not offer a true total-market option.
Most plans, however, offer something simila
