Why Invest in Boring Index Funds? Part 1

I’ve come to believe that one of the hardest things about investing is accepting that boring can be very profitable.

There is something tempting about trying to find the next big stock, time the market, or develop a complicated trading strategy. But the more I learn about investing, the more I appreciate the case for simply owning broad market index funds and letting the market do the work. History shows that index funds drift upward over time.

One of the ideas that really changed the way I think about the market came from Elliott Laybourne, an instructor at Goat Academy. Elliott puts it this way:

“The market doesn’t need a reason to go up. It needs a reason to do anything else.”

I realize that stocks don’t only go up. Obviously, they don’t. Markets can fall dramatically, and sometimes they do so very quickly. However, three powerful forces consistently work over time to increase demand for stocks while reducing their supply:

Force #1: Retirement Funds
Millions of Americans contribute to retirement accounts on a regular schedule, regardless of whether the market is having a great year or a terrible one. This creates a constant demand for stocks.

Force #2: Corporate Buybacks

Corporations regularly buy back their own shares, creating another source of ongoing demand while reducing the number of shares available to investors. This creates a shrinking supply.

Force #3 Dealer Hedging

When dealers sell stock options, they usually buy shares of the underlying stock to hedge their risk. At any given time, there are several hundred billion dollars of stock options in open positions which means lots of hedging is always taking place.

The result of these three forces is a market where buying pressure builds steadily, helping push major market indices higher.

Of course, sometimes markets go down, and when selling arrives, it can arrive very quickly. When investors become frightened by unexpected events and start dumping their shares, supply can suddenly overwhelm demand, producing sharp declines. But historically, those declines have usually been followed by recoveries and eventually new highs. The COVID-19 crash is a good example: the S&P 500 index fell roughly 34% in March 2020 before recovering to a new high later in August of that same year.

Investing in index funds isn’t about believing the market will never crash. It’s about accepting that crashes are part of the deal. It’s about recognizing that trying to predict every decline and recovery is incredibly difficult—and that staying invested in the broader market may be a better strategy than constantly trying to outsmart it.

Unlike individual stocks, investing in broad index funds is designed to capture the long-term growth of the overall market. Maybe that’s not the most exciting investing strategy. But when it comes to investing, boring isn’t necessarily bad. In fact, sometimes boring is exactly what works.