Choosing in advance which stock will perform best is difficult, even for professional investment teams. Over long periods, most actively managed U.S. large-cap funds have not outperformed the S&P 500. That is why many investors choose a simpler alternative: investing in diversified funds that seek to track an index instead of betting on a single company.
This guide sums up a Finhabits Talks conversation with a Vanguard advisor, backed by official sources so you decide with data instead of hunches.
Do most active fund managers really fail to beat the market?
Yes—at least among U.S. large-cap active funds. S&P Dow Jones Indices’ SPIVA Scorecard compares actively managed funds with their relevant benchmark, including the S&P 500 for large-cap funds.
In its Year-End 2025 report, 79% of active large-cap funds lagged the S&P 500 over one year. Over longer periods, the proportion was consistently higher: 86% to 93% failed to outperform over 10-, 15-, and 20-year horizons.
| Time frame | Active large-cap funds that did NOT beat the S&P 500 |
| 1 year | 79% |
| 5 years | 89% |
| 10 years | 86% |
| 15 years | 90% |
| 20 years | 93% |
Source: SPIVA U.S. Scorecard, Year-End 2025, S&P Dow Jones Indices. Figures are based on absolute return and data through December 31, 2025.
Over 20 years, 93% of active large-cap funds trailed the S&P 500. These are professionally managed funds with teams and research resources. The data puts into perspective how difficult it can be to identify, consistently and in advance, the stocks that will outperform the market.
The mistake of hunting for the needle
The image the advisor used says it well: people want to find the needle in the haystack — the next big stock. What if, instead of hunting the needle, you bought the entire haystack?
The trouble with hunting the needle is that the winners change over time. The companies that lead the market change over time. Exxon Mobil was one of the largest companies in the S&P 500 in the early 2000s, but it does not lead the index today. Predicting which companies will lead the market 20 years from now is very difficult.
A 2018 study by Hendrik Bessembinder, published in the Journal of Financial Economics, found that over the period studied beginning in 1926, most individual U.S. stocks had buy-and-hold returns below those of one-month Treasury bills. It also found that 4% of companies accounted for the net wealth creation of the U.S. stock market. This illustrates why identifying the biggest future winners in advance can be so difficult.
This helps explain the risk of chasing investment trends. When a stock or theme receives widespread attention, its price may already reflect some of those expectations. No one can know for certain what happens next.
Buying the whole haystack: what indexing is
Buying «the whole haystack» has a name: investing in an index. The SEC defines an index fund as one that follows a passive strategy designed to achieve approximately the same return as a particular index, before fees. Instead of betting on one company, you buy a basket that holds a portion of many.
When you invest in an index fund, some companies may rise and others may fall. If a company is included in the index, the fund will generally have exposure to it, so you do not have to select it individually in advance.
If you want the detail on how a fund that tracks an index works, we explain it simply here: what is an ETF?.
Not all indexes are the same
Here’s the nuance almost no one mentions. Today there are more index funds than there are individual stocks. It’s like Spotify: more playlists than songs. And just as finding «the best mariachi playlist» becomes its own task, so does choosing the right index.
One important distinction is between a broad index and a thematic one. A broad index may include many companies and sectors, but not all broad indexes cover the same market: some focus on large U.S. companies, while others also include mid-sized, small, or international companies. A thematic index typically concentrates on one sector, industry, or idea, which can increase risk compared with a more diversified fund.
For people seeking broader diversification, it can be helpful to understand how broad or concentrated a fund is. A financial professional can help evaluate that decision based on an individual’s goals, time horizon, and risk tolerance.
What this means for you
The practical takeaway is not to find a “perfect” index, but to understand which approach fits your goals, time horizon, and risk tolerance. Consistency and time can be important parts of a long-term investment strategy, but they do not guarantee results.
And you don’t need much to start. With fractional shares, investors may be able to buy part of an index-tracking fund with smaller dollar amounts. Starting with an amount that feels manageable and contributing regularly can help build an investing habit.
Watch the full conversation
Frequently asked questions
Can you ever beat the market?
It can happen. Some funds outperform the S&P 500 over certain periods. However, SPIVA data shows that over 20 years, 93% of active large-cap funds trailed the index. Outperforming the market for one year is different from doing so consistently over decades.
Is an index fund the same as an ETF?
Not exactly. An index fund is a strategy (tracking an index); an ETF is a type of vehicle that trades on an exchange and often tracks an index. An ETF can be indexed or not.
Do I need a lot of money to buy an index?
No. Thanks to fractional shares, you can invest in an index-tracking fund with small amounts, without needing thousands of dollars. With Finhabits you can start from $5 a week.
Is the S&P 500 the only option?
No. The S&P 500 tracks 500 large U.S. companies, but there are broader indexes that add mid-size, small, and international companies. What matters is understanding what the index includes and whether its level of diversification and risk fits your goals.
One way to stop chasing individual stock winners is to consider a diversified strategy designed to track an index. Before investing, consider your goals, time horizon, risk tolerance, and a fund’s costs.
Sources
SPIVA U.S. Scorecard, Year-End 2025 — S&P Dow Jones Indices
Index fund — definition, U.S. SEC (Investor.gov)
Diversification — U.S. SEC (Investor.gov)
Bessembinder, H. (2018), «Do Stocks Outperform Treasury Bills?», Journal of Financial Economics
Disclaimer
This material is provided for informational purposes only and is not intended to offer investment, legal, or tax advice. All images and figures are for illustrative purposes. Investment advisory services are offered through Finhabits Advisors LLC, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. Past performance is not indicative of future returns. All investments involve risk, including the possible loss of principal. Securities are offered through Apex Clearing Corporation, Member of FINRA, SIPC. Securities held at Apex are protected up to $500,000, which includes a $250,000 cash limit. See SIPC.org for more details.
Projections are for educational and illustrative purposes only. They are based on the assumptions stated and will change if those assumptions change. They do not predict or reflect the actual performance of any Finhabits portfolio, and they do not account for economic, market, or individual financial factors that can impact real investment outcomes.
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