Beyond the Index Fund

Nov 6

3 min read

Index funds are one of the best tools an investor has. They settle what to own, cheaply and efficiently. What you keep depends on everything around them: which accounts hold them, how you draw them down, how taxes are handled, and what you do when markets fall. Research from Morningstar shows that this second set of decisions is where results are won or lost.

What an index fund does, and what it can't

An index fund gives broad diversification at a very low cost, and it doesn't depend on picking winners. We have no argument with that. But it answers only one question: what to own. It can't decide:

Which accounts should hold which investments, so less of the growth goes to taxes
Which accounts to draw from first in retirement, and when to convert to Roth
When to claim Social Security
How to sell concentrated stock, RSUs, or options without an avoidable tax bill
How the portfolio fits with your estate plan, trusts, and beneficiaries
What to do when the market is down 25% and every instinct says sell

The fund earns the return. The investor often doesn't.

Every year Morningstar compares what U.S. funds return with what the average invested dollar actually earns once investors' purchases and sales are counted. In its 2026 study, covering the 10 years ended December 31, 2025, investors earned 1.2 percentage points a year less than the funds they owned. That gap cost them about 12% of their return, an estimated $3.8 trillion (Morningstar, Mind the Gap 2026).

Source: Morningstar, Mind the Gap 2026 (August 2026). 10 years ended Dec. 31, 2025.

Low-cost indexing didn't close the gap. Morningstar found "no strong evidence of a link between management style—active or passive—and timing gaps," and investors in the cheapest fifth of funds still gave up 1.0 point a year. Volatility mattered more: the gap was 0.4 points a year in the least volatile funds and 2.1 points in the most volatile. Nor is it new. In each 10-year period ending 2021 through 2025, it ran between 1.1 and 1.7 points a year. An index fund delivers the market's return. Keeping it is up to the investor.

What good advice can be worth

Morningstar's 2013 research paper "Alpha, Beta, and Now… Gamma" estimated that five planning decisions, including tax-efficient asset allocation and a dynamic withdrawal strategy, could add 22.6% to retirement income, the equivalent of 1.59% a year in extra return (Morningstar). Both figures come from simulations, not from actual client results.

How our team works with clients

Our value is the planning, not a claim to beat the market. We take on the decisions an index fund leaves to you, and we make them before markets force them:

Written plan: built around your whole balance sheet, including equity compensation, trusts, and insurance
Strategy meetings: on a regular schedule, with the plan updated as your life and the tax rules change
Implementation: we handle rebalancing and, where it applies, tax-loss harvesting
Coordination: with your CPA and estate attorney, so tax, estate, and investment decisions line up
Behavioral coaching: a steady hand when markets fall, so decisions follow the plan, not the headlines