What to Invest In: Stocks, Funds, and Index Funds

What should you invest in?

You don't have to pick stocks to invest. A stock is a small piece of one company. A fund is a basket of many investments, bought with money pooled from lots of people. An index fund is a fund that buys what's on a published list instead of trying to pick winners, which usually makes it cheap.

Index funds have become hugely popular: they held 52% of the money in US long-term mutual funds and ETFs at the end of 2025, up from 19% in 2010, according to the Investment Company Institute (ICI) (opens in a new tab).

An IRA is just the account, and so is a 401(k) or an HSA. Opening one is only half the job. Then you get a menu of funds with names like "Lifecycle 2060" and no explanation. This post is the other half.

Picture a grocery store

Think of the stock market as a giant grocery store, with every company an item on the shelf. Your 401(k) or IRA is the shopping bag: it sets the tax rules, but it isn't the food. There are four common ways to fill it:

• A single stock is one item off the shelf. You own a share of that company, and you make money if its price rises or it pays out part of its profits (a dividend). It might be great. It might spoil.
• An actively managed fund is a personal shopper. A manager fills a cart with the items they think will beat the rest of the store, and charges you for the work.
• An index fund is a fixed shopping list. An index is a published list of investments. The best known, the S&P 500 (opens in a new tab), is 500 leading US companies, covering about 80% of the US stock market's value. The fund buys what's on the list, with no opinions and no shopper to pay.
• A target-date fund is a meal plan. Someone builds the whole mix for you, usually stocks and bonds (loans to a government or company that pay interest), and shifts it toward bonds (opens in a new tab) as a chosen year gets closer, usually the year you expect to retire.

	Who picks	If one company fails	Average yearly cost, 2025
Single stock	You	You could lose it all	Usually no yearly fee
Actively managed stock fund	A manager	A small dent	0.64%
Index stock fund	The list	A small dent	0.05%
Target-date fund	The fund	A small dent	0.27%

The costs are 2025 mutual fund averages from the ICI (opens in a new tab), weighted by how much money is in each fund, so they show what investors actually paid.

Can't a professional just pick the winners?

Some do, for a while. Doing it for decades is the hard part. S&P's SPIVA scorecard (opens in a new tab) compares active funds with their benchmarks, and as of June 30, 2026:

• 78.69% of US large-cap funds trailed the S&P 500 over one year.
• 90.49% trailed it over 15 years.

(S&P publishes that index, so it isn't a neutral referee, but those are long odds.) Fees are part of the reason: a shopper has to beat the store by more than their wage just to break even with the list.

The flip side: an index fund won't beat the market either. It aims to match its list, minus a small fee. You give up the chance of a big win, and you don't have to find the winners, or the shopper who can.

How much do fees really cost?

Expense ratio: a fund's yearly cost, as a percentage of your money. It comes out of the fund, so you never see a bill.

Say you invest $10,000 once and leave it for 30 years, and the investments earn 7% a year before fees (an example, not a promise):

Yearly fee	Yearly return after the fee	After 30 years
None	7%	$76,122.55
1%	6%	$57,434.91

A 1% fee sounds tiny, but it costs $18,687.64, about a quarter of the result. Every dollar taken in fees also stops compounding for you.

The calculator opens on both lines of that table: the solid line is no fee, and the dashed line below it is the 1% fee. Change the amounts or years to try your own numbers.

Now the real averages. At 0.05%, that $10,000 grows to $75,062.61. At 0.64%, it grows to $63,584.29. That's a $11,478.32 difference.

One warning: "index" doesn't automatically mean cheap. Not all index funds cost less (opens in a new tab), and at the expensive end, some index stock mutual funds charge about 1.49% or more. Always check the actual number.

Mutual fund or ETF: what's the difference?

Same groceries, two checkout lines. Either one can be an index fund or actively managed.

• Mutual fund (opens in a new tab): you buy from and sell to the fund, at a price set once each business day.
• ETF (exchange-traded fund) (opens in a new tab): you trade it on the market like a stock, whenever the market is open.

In a 401(k), the menu usually makes this choice for you. In an IRA or a regular brokerage account, you can often buy either.

Can an index fund lose money?

Yes. Spreading your money protects you from one company failing, not from the whole store having a bad year. With dividends included, the S&P 500 lost 36.55% in 2008 and 18.04% in 2022. It still grew about 10% a year, compounded, from 1928 through 2025 (before fees, taxes, and inflation), using NYU Stern's historical data (opens in a new tab). My examples use 7% as a more cautious round number. Past returns don't promise future ones.

So when you need the money matters most. With decades to go, you can wait out a bad stretch. Money you'll need soon, like your emergency fund, usually doesn't belong in stocks.

That's why a target-date fund shifts toward bonds. But the SEC points out (opens in a new tab) that these funds don't guarantee retirement income, and that two funds with the same year can hold very different mixes and charge different fees.

How do you choose from your plan's menu?

The same steps work for a 401(k), an IRA, an HSA, or a 529 college savings plan:

1. Check that you're invested at all. Some accounts start out as cash until you choose something.
2. Find the plain options. Look for "index" in a fund's name, or a target-date fund with a year close to when you'll need the money.
3. Compare expense ratios. They're on the plan's fund list or each fund's fact sheet.
4. Keep it simple. A target-date fund is built to be the whole mix on its own, so adding other funds changes the mix it was designed to hold.

I don't always take the simple path myself. As I wrote in the HSA post, I like taking on more risk there, shifting between growth-oriented funds, stocks, and target-date funds. That's my personal preference, not advice. I think most people are better off with "set and forget."

Why it matters

Retirement, a child's college, any goal years away: compound interest needs something to work on, and an account sitting in cash barely grows. You don't need to be an expert to fix that. The plainest choices on the menu are often among the cheapest.

This is educational, not financial advice. For big decisions, consider talking with a qualified professional.

What to take with you

• You don't have to pick stocks. A fund lets you own many companies at once.
• Check that your money is invested. The account is only the bag.
• Look up your expense ratios. Small percentages become thousands of dollars over decades.
• Match the investment to the timeline. Stocks are for money you won't need for years, and even an index fund can drop sharply.

Want to see what a fee does to your own numbers? Try the compound interest calculator, and subtract the fee from the rate.