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Are index funds still the way to go?

Overqualified: Yale faculty answer your everyday questions

Michael Sloan

Michael Sloan

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Q:  “In 2009, the magazine published an interview with Yale chief investment officer David Swensen ’80PhD in which he recommended that individual investors stick to a mix of index funds rather than trying to pick stocks. Is that still the right choice in 2023?”

A:  David Swensen gave sound advice when he told personal investors to put their money in index funds. That advice holds now more than ever, for both inexperienced and sophisticated retail investors. Despite being, or perhaps because I am, a finance professor, all of my money is in index funds. Like many others, I sometimes feel a compulsion to deviate from an indexing strategy by picking specific stocks or engaging in market timing. And then I remind myself to stop being so full of myself. Somebody is on the other side of my trade, and that somebody is likely to be an institutional investor. When institutional investors have the advantages of advanced data analytics and specialized research teams, what are the chances that I can outsmart them? Retail investors are likely better off directing their efforts toward finding diversified index funds that offer convenience and low fees. —Kelly Shue, professor of finance, Yale School of Management.

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