Index funds are often described as “average” investments.
Yet over long periods, most individual investors underperform them.
This is confusing. Index funds do not analyse markets, react to news, or optimise decisions. People do.
This page explains why that mismatch exists.
The common assumption
Underperformance is usually blamed on a lack of intelligence, discipline, or information. The assumption is that better analysis or better advice should lead to better results.
That assumption is wrong.
Most people who underperform index funds are not careless or uninformed. They read, research, follow markets, and try to make sensible decisions. Many are financially literate and actively engaged.
The problem is not effort.
It is how human decision-making interacts with markets.
The structural difference
Index funds have one decisive advantage:
They do not make decisions.
An index fund simply holds a broad slice of the market, rebalances mechanically, and remains invested continuously. It does not interpret events or respond to discomfort.
Humans, by contrast, must decide:
- when to invest
- when to reduce risk
- when to exit
- when to re-enter
- when to change strategy
Each decision introduces timing risk.
Not because people choose badly on average, but because markets reward consistency more than responsiveness.
Why decision-making reduces returns
Financial markets move continuously. Human psychology did not evolve for this environment.
Three predictable effects follow.
Action bias
Doing something feels safer than doing nothing, especially when uncertainty rises. Remaining invested during uncomfortable periods feels irresponsible, even when it is statistically optimal.
Emotional timing
Confidence tends to rise after prices have already increased. Fear tends to peak after declines have already occurred. This leads to buying high and selling low without deliberate intent.
Strategy drift
When outcomes differ from expectations, people adjust their approach mid-cycle. Each adjustment resets the compounding process and converts long-term exposure into a sequence of short-term bets.
Index funds avoid all three effects by design.
Why intelligence doesn’t protect against this
Analytical skill helps with understanding systems. Markets do not consistently reward understanding.
They reward:
- exposure
- patience
- error avoidance
The more engaged a person is with markets, the more decisions they are forced to make. Each decision feels justified in isolation. Collectively, they degrade returns.
This creates a paradox.
The very traits that feel responsible and intelligent — monitoring, adjusting, responding — are the traits most likely to reduce long-term performance.
Index funds succeed not because they are clever, but because they are non-reactive.
The quiet advantage of mechanical behaviour
Index funds do not need to be right about the future. They only need to remain present.
By removing judgment and timing entirely, they eliminate the largest source of underperformance: human interference.
This is not a moral failing. It is a structural mismatch between human cognition and probabilistic systems.
Markets reward behaviour that feels passive, boring, and emotionally unrewarding. Human minds are drawn to behaviour that feels active, protective, and responsive.
The result is predictable.
Why this continues to surprise people
The explanation is simple, but the experience is counter-intuitive.
People expect effort to correlate with outcomes. They expect attention to improve results. They expect engagement to be rewarded.
In markets, the opposite is often true.
Index funds win precisely because they do not participate in those expectations.
Closing
Most people underperform index funds not because they lack knowledge or discipline, but because markets punish the behaviours that feel sensible and rewarding.
Once the role of decision-making is understood, the outcome stops being surprising.
Index funds are not average.
They are structurally aligned with how markets actually reward behaviour