“Index funds always beat active stock picking”

If you’ve ever spent much time read­ing the Investos­phere, you’ll have come across some form of this bon mot of dodgy wis­dom: “Index funds always beat active stock pick­ing”.

To whit:

“Why index funds beat stock pick­ers”

“Why Index Invest­ing Beats Active Stock Pick­ing (Most of the Time)”

“Do index funds per­form bet­ter dur­ing a bear mar­ket? (5 for­mi­da­ble facts that prove pas­sive investors will always win)”

Even the GOAT him­self says it:

“Why War­ren Buf­fett Says Index Funds Beat Stock Pick­ing for Most Investors”

My mate Steve Sam­marti­no told me the same thing when I first inter­viewed him back in 2008 about his “Sam­marti­no Method” of invest­ing (which is just buy­ing index funds) long before I had heard the name “Kynas­ton”.

War­ren’s actu­al quote is “A very low-cost index is going to beat a major­i­ty of the ama­teur-man­aged mon­ey or pro­fes­sion­al­ly man­aged mon­ey.”

And he’s cor­rect (of course). But the key words are ‘a major­i­ty’.

The way to be in the minor­i­ty, and to beat an index fund, isn’t hard — it’s called hav­ing a sys­tem.

Most investors, ama­teur and pro­fes­sion­al, don’t stick to a proven invest­ing sys­tem.

Let me quote again from WWOWS (the source of last week’s arti­cle):

Struc­tured invest­ing is a hybrid of active and pas­sive man­age­ment that auto­mates buy and sell deci­sions. If a stock meets the cri­te­ria, it’s bought. If not, not. No per­son­al, emo­tion­al judg­ments enter the process. Dis­ci­plined imple­men­ta­tion of active strate­gies is the key to per­for­mance. Tra­di­tion­al man­agers usu­al­ly fol­low a hit-and-miss approach to invest­ing. Their lack of dis­ci­pline accounts for their inabil­i­ty to beat sim­ple approach­es that nev­er vary from their meth­ods. Don’t sec­ond-guess. Don’t change your mind. Don’t reject an indi­vid­ual stock — if it meets the cri­te­ria of your strat­e­gy — because you think it will do poor­ly. Don’t try to out­smart.

• What Works On Wall St by James O’Shaugh­nessy

If you have a dis­ci­plined strat­e­gy, and you fol­low it day-in-day-out, you can beat an index fund — and most pro­fes­sion­al investors.

Let’s look at the num­bers.

What does the mar­ket actu­al­ly return over time?

Here are the STW (SPDR S&P/ASX 200 Fund) total return fig­ures, includ­ing div­i­dends, net of fees — as of 28 Feb 2026:

• 1 year: 16.20%
• 3 years p.a.: 12.15%
• 5 years p.a.: 10.73%
• 10 years p.a.: 10.64%

→ Source: ssga.com/au — STW fund page

Five-to-ten years is a rea­son­able time­frame for com­par­i­son. So the SPDR200 returns rough­ly 10–11% a year on aver­age.

Now let’s look at the per­for­mance of the funds and we’ll start with active fund man­agers.

In Aus­tralia 74% of active fund man­agers under­per­formed the ASX 200 last year, and over 15 years that blows out to 87%.

SPIVA Aus­tralia (S&P Glob­al, Year-End 2025 — pub­lished March 2026)

What a great gig that must be. Get paid a for­tune to under­per­form the index. I bet they all have real­ly impres­sive busi­ness cards.

But what about index funds?

Here are the ver­i­fied fig­ures as of Feb­ru­ary 2026:

VAS (Van­guard Aus­tralian Shares Index ETF) — after fees, total return

• 1 year: 16.38%
• 3 years p.a.: 12.12%
• 5 years p.a.: 10.62%
• 10 years p.a.: 10.69% → vanguard.com.au (as of 28 Feb 2026)

A200 (BetaShares Aus­tralia 200 ETF) — after fees

• 1 year: 16.46%
• 3 years p.a.: 12.28%
• 5 years p.a.: 10.97% → betashares.com.au (as of 27 Feb 2026)

Over 5–10 years the return 10–11%, the same as the SPDR200 (which is what you’d expect).

On the oth­er hand.…

And we do this part-time. I’ve prob­a­bly spent less than an hour a week man­ag­ing the QAV port­fo­lio in the last year. Dur­ing the last 12 months, in this port­fo­lio, I’ve only done 21 trades (10 sells, 11 buys). That’s an aver­age of less than one trade per month. Despite all of the chaos and volatil­i­ty, I’ve had to trade less than once a month.

Beat­ing the sys­tem isn’t hard if you have a sys­tem. It takes a sys­tem to beat the sys­tem.

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QAV Myth Killers is a week­ly col­umn in the QAV newslet­ter, tak­ing apart a piece of
invest­ing con­ven­tion­al wis­dom. Read the series, or
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