Why I Stopped Buying Index Funds (And What I Do Instead)

I've been the obnoxious "just buy VTI and shut up" guy for years. The math is irrefutable: low-cost index funds beat ~85% of active managers over 20+ years. The fees compound; the diversification matters; the discipline of "just keep buying" works. For most people, in most situations, index funds are the right answer — full stop.

And yet, two years ago, I started buying fewer of them. Not because the case against index funds got stronger. Because for a specific subset of investors at a specific stage of wealth, the math gets more interesting on the other side. This is who that subset is, what I do instead, and why I'd still tell 95% of people to just buy index funds.

The Case for Index Funds (Still Bulletproof for Most)

For the avoidance of doubt: I still believe index funds are the right answer for most investors. The case is unchanged:

• Low cost (0.03-0.20% expense ratios vs 1-2% for active management).
• Broad diversification (entire market exposure with one purchase).
• No manager risk (no underperforming fund manager to fire).
• Behavioral simplicity (you literally don't have to think — see save 30% is bullshit for why behavior matters).
• Tax efficiency (low turnover = low tax drag in taxable accounts).

If you're under 45, have under $250K invested, and don't have an "edge" in any specific market — index funds are the answer. Stop reading articles like this one; just keep buying VTI. Pick a broker, set up auto-deposit, ignore the noise.

The Case Against (For a Specific Subset)

The argument against pure index-fund accumulation isn't "index funds are bad." It's "for a specific subset of investors, there's a marginal case for some non-index allocation." That subset has three properties:

1. You have a real edge in a specific market. Not "I read business news"; not "I think AI will be big." A real edge is: you work in an industry and have direct visibility into companies, you have technical expertise that lets you evaluate specific companies' competitive positions, or you have access to information through professional networks that the broad market doesn't have.

Most people think they have an edge. Almost none do. The honest test: can you write down the specific informational asymmetry that gives you the edge, and would a finance professional in that field agree it's real? If not, you don't have an edge.

2. You have meaningful capital ($500K+). At smaller portfolio sizes, the diversification benefit of index funds dominates any potential alpha. With $50K invested, the difference between "index" and "concentrated" is the difference between $7K of expected return and... maybe $9K of expected return, with much higher variance. Not worth the complexity.

At $500K-$1M+, the absolute dollar differences become meaningful. 2% alpha on $1M is $20K/year. Worth the effort if you can actually generate it.

3. You can hold concentration through drawdowns. Concentrated positions have nasty drawdowns. A single stock can drop 60% and not recover. If you can't behaviorally hold through that, you'll panic-sell at the bottom and capture neither the upside nor the diversification of the index.

What I Actually Do (Honest Allocation)

For full transparency, my current allocation looks like:

• 60% broad index funds (VTI, VXUS, BND-equivalent for the bond sleeve). The boring core.
• 20% sector concentration in fields I have edge (specific tech sub-sectors I work in). Active picks within these sectors.
• 10% real estate (one rental property + Fundrise — see Fundrise vs Roofstock vs Arrived).
• 5% private investments (small angel checks in companies I have strong network access to).
• 5% speculative / cash (BTC, options, dry powder — money I'm willing to lose entirely).

The 60% core is the answer to "what would I do if I had no edge?" It's the floor. The other 40% is where the potential alpha lives.

Has this allocation outperformed pure VTI? Modestly. The sector concentration in 2023-2025 outperformed; the real estate is roughly market-rate; the private investments have one big winner (early-stage SaaS marked up 8x) and three writeoffs. Net of everything, I'm a few percentage points ahead of pure index. Most of which is luck and could have gone the other way.

Why "Stopped Buying" Is Misleading

I haven't stopped buying index funds. I've stopped only buying index funds. New contributions go to a mix of the above allocation, not 100% to indexes. The core position keeps growing.

The framing matters because the cultural narrative around index funds is increasingly cult-like. "Pure index" has become the orthodoxy in personal-finance circles. Any deviation gets treated as betrayal of the boglehead religion. This is overcorrection. Index funds are a tool, not a sacred truth. They're the right tool for most situations; they're not the only tool.

The Honest Risks of Deviating

If you're going to allocate anything outside index funds, you need to be honest about the risks:

1. Variance increases. Concentrated positions have wider outcome distributions. You might do better than the index; you might also do worse. Your expected return doesn't change much; your variance increases.

2. Behavioral pressure increases. Watching individual stocks tank is much harder than watching the index tank, even if the math is the same. Most people who deviate from index funds end up underperforming because they panic-sell during drawdowns.

3. Time investment increases. Pure index investing takes ~2 hours/year. Concentrated investing requires research, monitoring, position management. Whether the alpha is worth the time depends on the size of the portfolio and your hourly rate at other things.

4. Tax complexity increases. Individual positions create more taxable events than index funds. Tax-loss harvesting, wash sale rules, holding period optimization all matter. Our tax-loss harvesting guide covers the basics.

The Test: Should You Deviate?

Three honest questions:

1. Do you have a real edge? Write it down in one paragraph. Read it to a trusted finance professional. Would they say it's real?
2. Can you hold concentrated positions through 50%+ drawdowns? Honest answer, not aspirational. If you sold during 2022, the answer is no.
3. Is your portfolio big enough that the alpha matters in absolute terms? 2% alpha on $50K = $1K/year. Not worth the complexity. 2% alpha on $1M = $20K/year. Worth considering.

If you answered "no" to any of the three: stay 100% in index funds. The marginal upside isn't worth the marginal risk.

If you answered "yes" to all three: there's a case for limited concentration. Maximum 30-40% of portfolio outside index, ever. The core has to remain index for diversification baseline.

The Boglehead Counterargument (Honest)

The boglehead counterargument is real: most people who think they're the special case aren't. Statistically, ~95% of investors who deviate from index funds underperform the index over 20-year windows. Even professional fund managers — people whose entire job is investing — underperform 80%+ of the time over 15-year windows.

The implication: if a guy with an MBA, 10 hours/day, and Bloomberg terminal access can't beat the index, what makes you think you can? Most people who deviate are flattering themselves about edge that isn't real.

This counterargument is right for ~95% of investors. I'm trying to write for the 5% who genuinely have an edge — while acknowledging that the 5% number might be 1% and most of us thinking we're in the 5% are actually in the 95%.

The Default for Almost Everyone

For 95%+ of readers: buy index funds. Buy more index funds. Buy them every month. Don't sell. Stop reading articles like this one. Pure boglehead is the right answer for almost every retail investor.

For the rare reader who genuinely has edge, capital, and behavioral resilience — there's a case for some concentration. Cap it at 30-40% of portfolio. Keep the core in index funds always. Be honest about whether the alpha is real or whether you're just rationalizing the gambling impulse.

For the deeper question of whether index or concentration is right for your specific situation, see index funds vs individual stocks: where the edge actually is. For the broader brokerage choice that supports either strategy, see M1 vs Fidelity vs Robinhood.