Retirement planning is a complex process that involves more than just putting money aside for the future. You have to think about the type of lifestyle you want in your post-working years and account for healthcare costs and inflation, among other considerations. Fortunately, you can get a head start by investing early with support from a qualified wealth manager.
In the Federal Reserve's 2022 Survey of Consumer Finances, the median total financial assets for households ages 30 to 39 was $23,000. Assuming a modest 5 percent rate of return and $20,000 in annual contributions, a $23,000 investment portfolio today would be worth $1 million within 25 years. However, the Fed's survey also revealed that more than half of households in this age category do not own individual stocks or bonds. These have higher average returns than index funds, but also carry greater risk.
What Are Index Funds?
Index funds are increasingly popular passive investments that mirror the performance of the S&P 500 and other market indexes. They offer broad market exposure and diversification across a variety of stocks and bonds and have lower management fees compared to actively managed funds. This is because there are no associated stock research costs and fewer transaction fees and commissions due to less frequent trading. When accounting for management fees, many index funds have performed better than their actively managed peers over long periods of time.
Investors are shifting more assets to index funds in recent years than ever before. In 2010, 19 percent of the $9.9 trillion in long-term funds among US investors was allocated to index mutual funds and index exchange-traded funds (ETFs), index funds that hold multiple securities but can be traded like stocks. This increased to 48 percent by 2023.
Stocks Explained
A stock, also known as equity, represents an ownership share of the issuing corporation. Stock owners profit—or lose money—based on the market performance of the corporation and the number of shares (units of stock) they control. Corporations issue stock to generate operating income, and investors can purchase shares on public exchanges like NASDAQ or the New York Stock Exchange.
Individual stock holders can receive profits through capital appreciation or dividends. They can opt to sell their shares when the stock increases in price or earn a percentage of cash distributions from company profits.
Expectations and Returns: A Key Difference
While there's potential for greater rewards when investing in individual stocks, index funds on average have outperformed actively managed funds. Data from the S&P Indices Versus Active scorecards in 2024 shows that, over the last 15 years, 88 percent of actively traded funds underperformed the S&P 500. Two popular index funds, the Vanguard 500 Index Fund Admiral Shares and Fidelity Nasdaq Composite Index Fund, have 10-year average annual returns of 12.94 and 16.37 percent, respectively.
Buying individual stocks can have key benefits over index and actively managed funds, as it doesn't require paying an annual management fee and can produce higher-than-average returns. However, this self-directed investing strategy requires market knowledge and a high degree of research.
Risk and Volatility
While there is potential for greater rewards when investing in individual stocks compared to index funds, there's also a significantly larger degree of risk. Through the first three months of 2026, several stocks, including Moderna Inc. (MRNA), had already had returns exceeding 50 percent. Conversely, many had already lost more than 30 percent of their value since the start of the year.
Index funds may not be as volatile as individual stocks, but they're not without their disadvantages. They provide attractive returns in bull markets, but in prolonged market downturns—because they mirror the broader market—they tend to perform poorly.
Passive Investments
Index funds are passive investments, meaning they require minimal effort and knowledge. Their performance is aligned with market benchmarks. Investing in individual stocks requires extensive research into the financials of a company and the momentum of the industry in which they operate. Asset diversification is also an important investment strategy. With individual stocks, this means even more time dedicated to research.
"Index funds are a low-cost way to track a specific group of investments, which can be more broadly diversified than individual stocks and simpler to buy than each of the individual holdings within the index," said Autumn Knutson, an Investopedia top-100 financial advisor. "They are very popular for people looking to invest in a group of investments in a simple and cost-effective way."
What's the Best Strategy?
There's no one-size-fits-all investment strategy. If you're willing to take on more risk and have the time and knowledge for self-directed investment, individual stocks may be preferable. If you have a long-term retirement window with plenty of working years ahead, index funds offer the potential for steady, modest gains with limited risk due to asset diversification.