In recent years, index funds and passive investing have become buzzwords in the financial world. At Nova Wealth, many of our clients arrive at our door already holding index funds, believing they’re on the right track. And while that’s a great start, there’s a troubling trend we’re seeing: most investors who believe they’re passive… aren’t.

This matters. Because the distinction between truly passive investing and simply holding index funds can have a significant impact on your long-term returns, risk profile, and peace of mind.

In this blog, we’ll break down why most index fund investors are unknowingly making active decisions, the risks of doing so, and how wealth management can ensure your investment strategy aligns with your goals.

### A quick refresher on passive investing

The concept of passive investing is rooted in one core truth: markets are efficient. Rather than trying to predict winners, and time the market (as active managers do), passive investors aim to own the entire market, accepting that while they can’t control returns, they can reduce costs and capture long-term growth.

The pioneer of passive investing, [John Bogle](https://www.google.com/url?q=https://www.investopedia.com/terms/j/john_bogle.asp&sa=D&source=docs&ust=1749219758709621&usg=AOvVaw1OdteBnCbqOv44WjHiifha) (Founder of Vanguard), created the first index fund in 1975. His philosophy was simple but revolutionary: invest in everything, minimise fees, and avoid emotional decision-making.

But here's the problem: most index fund investors today aren’t actually doing that.

### Index funds ≠ passive investing

At first glance, buying an index fund seems passive. It says “passive” on the fact sheet. It tracks an index. Job done, right?

Not quite.

The problem lies in how these index funds are created and used. Many index funds are passive in name only - designed by marketing teams to appear diversified while targeting narrow sectors, themes, or arbitrary criteria. Think “High Yield AI ETF” or “Emerging Markets Small Cap Index”. These are not neutral, broad-market strategies. They are actively designed products, masquerading as passive investments.

In fact, research shows that [one-third of index funds track custom indices](https://www.spglobal.com/spdji/en/documents/custom-indices/brochure-custom-indices.pdf) that were created specifically for those funds - effectively allowing providers to pick the stocks without calling it active management.

If your portfolio consists of niche, thematic index funds or a jumbled mix of ETFs collected over the years, you're not investing passively. You’re actively making bets, even if you don’t realise it.

###  The real cost of passive-in-name-only investing

You might be thinking, “Surely I’m still better off than someone chasing individual stocks?” Not necessarily, and here’s why:

1. Asset allocation drives returns
Research shows that up to [90% of portfolio performance comes from asset allocation](https://www.jstor.org/stable/4478947), not the specific funds or stocks you choose. If you don’t have a clear, diversified asset allocation strategy, you’re likely taking on more risk (or less return) than you realise.

2. Behavioural mistakes add up
 According to [Morningstar](https://www.morningstar.com/funds/how-largest-bond-funds-did-2023), the average index fund returned 8.1% annually over the last decade. But the [average investor](https://www.google.com/url?q=https://www.morningstar.com/personal-finance/fund-investors-who-kept-it-simple-captured-more-return&sa=D&source=docs&ust=1749219864607665&usg=AOvVaw3y3K7NmgBaKqrEZSd3-kbd) only earned 7%, missing out on 1.1% per year due to poor timing and switching funds at the wrong time.
Investors using sector-specific index funds fared even worse, underperforming by nearly [3% annually](https://occaminvesting.co.uk/do-diy-investors-underperform/#:~:text=Investors%20have%20fared%20the%20worst,year%20period%20through%20April%202021.). That’s real money left on the table, often caused by a lack of conviction or clarity in the investment plan.

3. Complex portfolios increase stress
We regularly see clients with 10–20 different index funds, each added for a different reason- an article, a tip, a market trend. These portfolios lack cohesion and create decision fatigue, especially when markets fall. This often leads to panic-driven decisions, which can severely damage returns.

###  True passive investing- a different way of thinking

To be a truly passive investor requires a mindset shift. It's not about choosing funds with the lowest fees or tracking performance obsessively. It’s about building a well-diversified, globally allocated portfolio, aligned with your risk tolerance and goals, and then sticking with it through thick and thin.

This means:
- Investing in broad-market, globally diversified funds
- Avoiding fads, trends, and sector-specific bets
- Maintaining a disciplined asset allocation
- Rebalancing periodically—not reactively
- Understanding that volatility is normal, not a reason to change strategy

### Final thoughts

Passive investing is a powerful strategy, but only when it’s done properly. Many investors are unknowingly undermining its benefits through poor fund choices, emotional decisions, and a lack of structure.
At Nova Wealth, we believe in evidence-based investing and disciplined wealth planning. Whether you’re a seasoned investor, or just getting started, we’ll help you cut through the noise, focus on what matters, and secure a financial future built on clarity and conviction.

[Book a Discovery Call Today](https://calendly.com/nova-wealth/discovery-call-2)
Let’s talk about how we can help you take control of your financial future. Visit novawm.com/contact to get started.

**Capital at risk.**  Past performance is used as a guide only. It is no guarantee of future returns. Different funds and asset classes carry varying levels of risk depending on the geographical region and industry sector. You should make yourself aware of these specific risks prior to investing. Any examples used in this article are for illustrative purposes only and you may get less back than the figures shown. This article does not constitute personal advice. We do not take any responsibility for third party websites and content we may link to from this article.

Issued on behalf of Nova. Nova is a trading name of Nova Wealth Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN: 778951) and is a limited company registered in England & Wales (10739796).


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