The Rules of Using Index Funds: Simple, Smart, But Not Always Easy
There’s a strong case to be made for using index funds—or their exchange-traded cousins, ETFs—as the foundation of your equity portfolio. For long-term investors, these vehicles offer broad market exposure, low costs, and tax efficiency. In short, they are one of the simplest and most effective ways to capture equity risk and grow wealth over time.
But while index funds may be efficient, they are also static. They don’t adapt. They don’t hedge. They don’t flinch. They simply follow the market—up, down, and sideways. And that’s where the real challenge lies.
At Sevey Wealth, we believe in using index funds intentionally. Not emotionally. Not re-actively. Below are the three core rules we follow when indexing is part of the strategy.
Rule #1: Index Funds Are Time-Based Investments, Not Valuation-Based
When you invest in an index fund, you’re not trying to time the market or take advantage of a “cheap” entry point. You’re making a long-term bet—10 years or more—that the stock market will be worth more in the future than it is today. Indexing is not about chasing returns; it's about capturing the market’s broad, compounding power over decades.
This means the typical holding period is indefinite. Selling should be rare, and only for reasons tied to your personal financial plan—not because the headlines turned scary.
Rule #2: The Market Is Efficient and All-Knowing
Indexing assumes that all available information—earnings reports, interest rate forecasts, geopolitical risks, and more—is already priced in. There’s no edge to be gained in trying to outguess the market day to day. Rather than attempting to be smarter than the crowd, indexing simply is the crowd.
If you believe markets are generally efficient, then trying to pick the next big winner or time a downturn is more likely to subtract value than add it. That’s why we focus our energy on things we can control: costs, taxes, allocation, and behavior.
Rule #3: There Are No Brakes
This is perhaps the most important rule—and the most overlooked. When you invest in an index fund, you are signing up for the full ride. There’s no downside protection. No exit ramp when the market starts to panic. You participate in all the upside and all the downside.
Which means: there must be a plan in place before volatility hits.
If you panic and sell during a downturn, you’ve just locked in a permanent loss. And sadly, study after study shows that too many investors do exactly that. They don’t underperform the market because the market failed them—they underperform because they bailed at the worst possible time.
At Sevey Wealth, capitulation—the moment someone gives up on their investment strategy out of fear—is something we work hard to avoid. Because the market has always recovered. But your portfolio can’t, if you abandon it.
Indexing Is an Investment Strategy—Not a Financial Plan
It’s important to remember that indexing is a method for managing equity risk—it’s not a full financial plan.
A financial plan addresses far more than which funds to buy. It guides your savings, spending, tax strategy, income generation, risk management, and long-term goals. Without that structure, even the best investment strategy can fall apart at the wrong moment.
You need to know:
How much risk your plan actually requires
What you’ll do during market corrections
When and why you’ll sell
How investments will fund specific goals like retirement, college, or legacy giving
Index funds may form the foundation of your portfolio. But your financial plan is what gives them purpose and direction.
Where Indexing May Fall Short: Bonds and International Stocks
While indexing can work well for U.S. large-cap equities, it’s not always the best choice across every asset class.
Bonds, for example, are a very different animal. Many bond indexes are heavily weighted toward the most indebted issuers—not necessarily the most creditworthy. Skilled active managers can navigate interest rate risk, credit quality, and liquidity far more effectively, especially in times of stress.
Similarly, international and emerging markets can be less efficient than the U.S. stock market. Political instability, currency fluctuations, and uneven access to information can create opportunities for active managers to add value—especially in smaller or less developed markets.
At Sevey Wealth, we believe low-cost, actively managed strategies can play a meaningful role in these areas, and often serve as a valuable complement to core indexing.
Final Thoughts
Index funds offer a clean, low-cost way to access equity markets—but they require discipline, patience, and a plan. Without those, they can just as easily become a source of regret rather than reward.
We believe indexing works best as part of a broader strategy, guided by thoughtful planning and ongoing personal advice. If you're investing without a plan—or without a clear understanding of your capacity for volatility—you’re not giving yourself the full benefit of what index funds can offer.
Let’s talk about how indexing can support your goals, not distract from them.
