Index funds and diversification: give a portion to seven

Give a portion to seven, and also to eight

Ecclesiastes 11:2 keeps an old merchant’s rule: “Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth” (KJV). Spread your ventures, because you cannot know in advance which ship goes down.

Applied to investing, that is diversification. Own many companies rather than a few, so that one failure cannot sink everything. This is an application, not the verse’s own subject; the writer meant literal trading ventures, not funds. But the reasoning carries over exactly: the future is hidden, so do not stake it all on one guess.

What an index fund actually is

An index fund holds every company in a defined market index, in proportion, and nobody hand-picks the winners. The S&P 500, for instance, is a list of 500 large U.S. companies.

Buy one share of a broad index fund and you own a sliver of every business on that list. That is diversification in a single purchase, at very low cost.

An index fund will never beat the market, because it is the market. It will also never badly trail the market. The second half of that sentence matters more than most people expect.

Keep one distinction straight. An S&P 500 fund holds large U.S. companies only. A total-market fund holds those plus mid-sized and small ones, a few thousand in all. Both are broad; the total-market fund is broader.

Expense ratios compound too

Every fund charges an expense ratio: a yearly percentage of your money, taken to cover the fund’s costs. The averages are published each year.

(Asset-weighted averages, Investment Company Institute, Trends in the Expenses and Fees of Funds, 2025, published March 2026. As of 2026 this is the current edition; ICI refreshes it each spring.)

Those gaps look tiny. They are not, because fees compound the way returns do, only in reverse. A 1% yearly fee does not cost you 1% of your final balance. It takes a compounding slice of every year’s growth, on top of every prior year’s growth.

So run it once. Save $500 a month for 30 years. The market grows 7% a year before fees:

Same market, same saving, same thirty years, and the fee alone ate a six-figure sum. (Computed with this site’s own engine; put your own numbers into the compounder.)

Low cost is not a minor feature of an index fund. It is most of the reason index investors keep what the market actually earns.

Why most active managers fall short

S&P Dow Jones Indices measures this twice a year in its SPIVA scorecard, and the pattern is stubborn. These are U.S. equity funds scored against their own benchmarks over 15 years, with data through 30 June 2025:

Not one of the 18 U.S. equity categories in that report had a majority of active managers beating its benchmark over 15 years. Survival is its own filter, too: of the large-cap funds running 15 years earlier, only 49.95% were still open at the end.

Read the claim carefully. It does not say nobody ever beats the market. It says that picking, in advance, who will has proved very hard even for professionals. That is why a low-cost index fund is a reasonable default rather than a compromise.

Because SPIVA publishes twice a year, the edition is part of the claim. The table above is the mid-year 2025 edition; the scorecard library linked in the sources always carries the current one.

Dollar-cost averaging

Dollar-cost averaging means investing a fixed amount on a fixed schedule, whatever the price is that week (Investor.gov). When prices are high the contribution buys fewer shares, and when they are low it buys more.

It does not guarantee a better result than one lump sum invested at once. What it removes is the guesswork, and the pull to wait for a “right time” that never announces itself. It is a habit you can automate, not a market call.

Put the three ideas together and the shape of a sound long-term portfolio is plain: broad, cheap, funded on a schedule. For the biblical case for patient multiplication, read investing and multiplication. For how to open an account, read accounts: getting started. This is general education, not a recommendation of any fund or provider. Secular explainers (Two Cents on what an index fund is, and Ben Felix on the case for them and on advisor incentives) are linked, not embedded, on the video shelf. The SEC’s definition is on further reading.