Index Funds vs. Stock Picking for Minors: Why Simple Beats Clever Over 18 Years

Over the 20 years through June 2026, 92.61% of actively managed large-cap U.S. stock funds trailed the S&P 500, according to the SPIVA U.S. Scorecard Mid-Year 2026 from S&P Dow Jones Indices. Those funds are run by full-time professionals with research teams and decades of experience. Most of them still came out behind a fund that simply buys the stocks in the index and holds on.

That’s the heart of the case for index funds in a child’s account. A nest egg started at birth has something most investors don’t: roughly 18 years before the first big withdrawal. Over a stretch that long, the things that sink stock pickers, such as fees, frequent trading, taxes, and the odds of missing the few stocks that drive the market, have plenty of time to compound against you. A low-cost index fund sidesteps all four. This guide walks through the evidence, what fees and taxes really cost, what an S&P 500 strategy built on a fund like Fidelity’s FXAIX looks like in practice, how index funds fit each kind of child’s account, and where a little stock picking can still earn a place, as a lesson rather than a strategy. It’s part of The GoodNest Guide to Investment Strategies & Portfolio Allocation, which covers how to divide a child’s money among stocks, bonds, and cash.

What index funds and stock picking mean

An index fund is a mutual fund or exchange-traded fund (ETF) that tries to match the return of a market index rather than beat it. According to the SEC’s Investor.gov page on index funds, some hold every security in their index and others hold a representative sample. Because their managers aren’t picking securities, they don’t need teams of research analysts, which can mean lower costs, though the SEC cautions that not every index fund is cheaper than every actively managed fund.

The index most families start with is the S&P 500. S&P Dow Jones Indices, which maintains it, describes it as an index of 500 leading U.S. companies, weighted by market value, that covers more than 80% of the U.S. stock market. Weighting by market value means bigger companies take up a bigger share, so the largest companies have the most influence on the results.

Stock picking means choosing individual companies you expect to do better than the market, either yourself or by paying an active fund manager to choose them. The Investment Company Institute’s report Trends in the Expenses and Fees of Funds, 2025 describes the trade-off. Active managers have room to shift among sectors and securities and often do extensive research, which gives them a chance at better returns but tends to make them more expensive to run. Index fund managers simply buy and hold what’s in the index, so their portfolios change rarely and their trading stays low.

For a child’s account, the choice comes down to odds, costs, and taxes. On all three, the evidence leans heavily toward the index.

The scorecard: how often stock pickers beat the index

S&P Dow Jones Indices has kept score between actively managed funds and their benchmarks since 2002, in reports called SPIVA. Two features make its scorecard hard to argue with: it judges each fund against the index that matches its style, and it counts funds that closed or merged along the way instead of quietly dropping them. Here’s how actively managed large-cap U.S. stock funds did against the S&P 500 over periods ending June 30, 2026.

• Share of funds that trailed the index, periods ending June 30, 2026

Each bar is the share of actively managed large-cap U.S. stock funds that trailed the S&P 500 over the period ending June 30, 2026, with returns after fund fees. Funds that closed or merged during the period count as trailing. Source: S&P Dow Jones Indices, SPIVA U.S. Scorecard Mid-Year 2026. Past results don’t predict future ones.

See the numbers

Large-cap funds against the S&P 500, periods ending June 30, 2026

Period	Funds at the start	Trailed the index	Still running at the end
1 year	812	78.69%	96.80%
3 years	800	76.63%	84.25%
5 years	693	89.32%	88.74%
10 years	912	83.33%	68.75%
15 years	1,062	90.49%	53.01%
20 years	690	92.61%	36.52%

In every period the scorecard measures, from 1 year to 20, most large-cap funds came out behind the index. Over 15 years, 90.49% trailed it, and over 20 years, 92.61% did. The longer view also shows how many funds didn’t make it: of the 690 large-cap funds that existed in mid-2006, only 36.52% were still running 20 years later. SPIVA notes that funds are usually merged or closed after a stretch of poor results, so the funds that vanish are mostly ones that were falling behind.

The gap shows up in returns, too. Over those 20 years, the S&P 500 returned 11.39% a year. The average large-cap fund returned 9.47% a year when every fund counts equally, or 10.33% a year when bigger funds count for more. Nor was this a quirk of one era. In 22 of the 25 calendar years from 2001 through 2025, most large-cap funds trailed the S&P 500.

Some funds do beat the index in any given stretch. In the first half of 2026, for example, 32.82% of large-cap funds came out ahead. The trouble is knowing in advance which ones will keep winning. S&P’s companion Persistence Scorecard tracks exactly that, and according to an ETF Trends summary of its latest results, only 0.46% of the U.S. stock funds that ranked in the top quarter of their categories in 2021 stayed there every year through 2025. Last year’s star fund is a poor guide to the next 18 years.

Warren Buffett made the same point with a famous wager. In his 2017 letter to Berkshire Hathaway shareholders, he reported the result of a 10-year bet, running from 2008 through 2017, that an S&P 500 index fund would beat five funds of hedge funds chosen by the investment firm Protégé Partners. The index fund gained 125.8% in total, or 8.5% a year. The five funds, which together held stakes in more than 200 hedge funds, averaged between 0.3% and 6.5% a year.

One fair caveat: the scorecard compares funds, after their fees, with an index that has no fees at all. A real index fund trails its index by a little, mostly its expense ratio, and the SEC notes that trading costs and tracking error can add to that gap. With the cheapest S&P 500 funds charging 0.015% to 0.04% a year, though, that shortfall is tiny next to the gaps above.

Why picking individual stocks is even harder

If professionals struggle to beat the index with whole portfolios, picking a handful of stocks for a child’s account is a steeper climb. Finance professor Hendrik Bessembinder studied the lifetime returns of every U.S. common stock in a major research database from 1926 through 2016, in a paper titled “Do Stocks Outperform Treasury Bills?” He found that most of those stocks, about four in seven, earned less over their lifetimes than one-month Treasury bills, which are about as close to risk-free as investing gets. The market’s long-run gains came from a small minority: the best-performing 4% of companies accounted for the stock market’s entire net gain since 1926, while all the others together did no better than Treasury bills.

Bessembinder concluded that this lopsided pattern helps explain why poorly diversified active strategies usually trail market averages. A portfolio of five or ten stocks is likely to miss most of the rare, enormous winners. An index fund owns them all by design, along with the laggards, and the winners carry the result.

Owning everything has a quirk worth knowing, too. Because the S&P 500 is weighted by market value, a few giant companies drive a large share of its results. The SPIVA report shows the seven mega-cap stocks known as the Magnificent 7 made up 31.6% of the index in June 2026, down from 34.9% at the end of 2025. That’s still far more diversified than a handful of individual stocks, but it’s one reason some families pair an S&P 500 fund with a total market or international fund, as covered below.

Trading too much is its own risk

Stock picking usually comes with more buying and selling, and research on everyday investors shows how expensive that habit can be. In a well-known study, “Trading Is Hazardous to Your Wealth,” finance professors Brad Barber and Terrance Odean examined 66,465 households with accounts at a large discount broker from 1991 to 1996. The households that traded the most earned 11.4% a year, while the market returned 17.9%. The average household earned 16.4% and turned over 75% of its portfolio each year. The researchers pointed to overconfidence as a driver of all that trading.

The same pattern shows up with funds. Morningstar’s Mind the Gap US 2026 study estimates that the average dollar invested in U.S. mutual funds and ETFs earned 8.7% a year over the 10 years through 2025, about 1.2 percentage points a year less than the funds’ own 9.9% return. Morningstar traces that gap to the timing and size of investors’ purchases and sales.

In a child’s account, the risk isn’t only a teenager glued to a trading app. It’s also a parent tempted to sell during a scary year, or to chase whatever did well last year. A broad index fund paired with automatic contributions takes most of those decisions off the table. The Psychology of Generational Wealth and Automating the Nest Egg show how to build those habits.

Fees compound over 18 years

Every fund charges an expense ratio, a percentage of your balance taken from the fund’s assets each year. You never see a bill, but you pay it every year your child’s money is invested. The ICI report found that in 2025, investors in actively managed stock mutual funds paid an average of 0.64% a year, while investors in index stock mutual funds paid an average of 0.05%. Index stock ETFs averaged 0.14%. All three figures are weighted by assets, so they reflect what the typical invested dollar actually paid.

A fraction of a percent sounds trivial, but it’s taken from a growing balance every year for 18 years. Here’s what different fees would do to two common ways of saving for a child, in our own hypothetical example of a 7% average annual return before fees.

Hypothetical example: a 7% average annual return before fees, with each fee subtracted from that return. The gift compounds yearly for 18 years, and the $100 is deposited at the end of each month for 216 months, growing at the same annual rate, compounded monthly. No taxes. The 0.05% and 0.64% figures are 2025 asset-weighted averages from the Investment Company Institute. Not a prediction or guarantee.

The cheapest index fund and the average actively managed fund start out the same, but by age 18 the gap on $100 a month is about $2,546, more than two years of contributions. On a $10,000 gift at birth, it’s about $3,375. And that assumes the actively managed fund keeps pace with the market before its fees, which, as the scorecard shows, most don’t. How Does Compound Interest Actually Work for Minors? explains why money invested early carries so much weight.

Taxes: why buy-and-hold fits a custodial account

Taxes are a second, quieter cost of frequent trading, and they matter most in a custodial account set up under the Uniform Transfers to Minors Act or the Uniform Gifts to Minors Act (UTMA or UGMA). The money in those accounts belongs to your child, so every sale at a gain creates taxable income in your child’s name. Under the IRS’s Topic 409 on capital gains and losses, a gain on an investment held one year or less is short-term and taxed at ordinary income rates, while a gain on one held more than a year is long-term and may be taxed at a lower rate, possibly 0%.

The kiddie tax raises the stakes. Under Revenue Procedure 2025-32, the first $1,350 of a child’s investment income in 2026 is tax-free, the next $1,350 is taxed at the child’s rate, and income above $2,700 can be taxed at the parents’ rate. An account that churns through stocks can cross those lines quickly. Navigating the 2026 Kiddie Tax Thresholds covers the details.

A buy-and-hold index fund keeps taxable events to a minimum. You’ll still owe tax on dividends each year, and mutual funds occasionally pass along capital gains, but most of the growth stays untaxed until you sell. That lets you decide when to take gains, such as spreading sales across several years to stay within the lower kiddie tax tiers. Inside a 529 plan, a custodial Roth IRA, or a Trump Account, changes to your investments don’t trigger tax when they happen, though each account limits what you can hold, as the sections below explain. Custodial Brokerage Accounts vs. Parent-Owned Taxable Accounts weighs whose name the money should be in.

What an S&P 500 strategy looks like in practice

An S&P 500 index fund is one of the simplest ways to put this evidence to work, and Fidelity’s FXAIX is a popular example. The Fidelity 500 Index Fund tracks the S&P 500, charges 0.015% a year, or about $1.50 on every $10,000 invested, and has no minimum, according to a 24/7 Wall St. profile of the fund published in August 2026. Fidelity customers can buy it without a transaction fee, and like most mutual funds it can be bought in exact dollar amounts, so a $25 birthday gift can go to work in full. Buying it through another brokerage can cost extra, so families whose accounts are elsewhere usually use their own firm’s version.

Every major fund company offers something similar. The table below draws on Bankrate’s 2026 comparison of S&P 500 index funds and, for State Street’s SPYM, the default fund in Trump Accounts, an ETF Trends report on fund fees. All six track the same index, so the real differences are cost, minimums, and where your child’s account lives.

Expense ratios and minimums as reported by Bankrate in 2026, and for SPYM by ETF Trends, as of October 2, 2026. On every $10,000 invested, a 0.015% expense ratio costs about $1.50 a year, and a 0.04% ratio costs $4 a year. ETFs trade by the share, and many brokerages also sell fractions of a share. Buying one firm’s mutual fund through another brokerage may carry a transaction fee. Check current figures before you invest.

The practical rule is to use the cheapest broad index fund available where your child’s account already is, and to check the expense ratio before you buy, since fees can change. If you’d rather own the whole U.S. market, total market funds such as Vanguard’s VTI or iShares’ ITOT also hold the mid-sized and smaller companies the S&P 500 leaves out.

Making an S&P 500 fund the core of a child’s portfolio comes with three trade-offs worth knowing:

• It’s all large U.S. companies. There are no small companies, no international stocks, and no bonds, and as noted above, a handful of giant firms carry a lot of weight. Some families add a total international stock fund for broader reach.
• It falls with the market. The SEC notes that an index fund carries the same general risks as the securities in its index. In annual return data kept by NYU finance professor Aswath Damodaran, the S&P 500 lost 36.55% in 2008, dividends included. Over longer stretches it has been far kinder: it didn’t lose money in any of the 81 overlapping 18-year periods from 1928 through 2025, and even the worst, 1929 through 1946, gained 2.03% a year.
• It’s built for long-term money. As a goal gets close, that money should move toward bonds and cash so one bad year can’t derail it. Building a Target-Date Glide Path and The Role of Bonds and Fixed Income cover that shift.

How much of a child’s savings belongs in stock index funds depends on when each dollar will be spent, and The GoodNest Guide to Investment Strategies & Portfolio Allocation walks through that decision goal by goal. Families who want an index approach that reflects their values can also look at screened index funds, covered in ESG Investing for the Next Generation.

Where index funds fit in each account

Whether you can hold FXAIX, an ETF, or individual stocks depends on the account. Here’s the short version.

Brokerages decide which funds and stocks their custodial accounts and Roth IRAs offer. The Trump Account limit applies until January 1 of the year your child turns 18.

A few details behind the table:

• 529 plans don’t let you buy individual stocks or outside funds. The SEC’s introduction to 529 plans explains that savers choose from the plan’s range of options, often mutual funds and ETFs, along with static and age-based portfolios. Saving for College’s guide to 529 investment options notes that many plans let you choose between active and passive management, so look for the plan’s index-based options and compare their fees. Its explainer on 529 investment changes adds that you can move money that’s already invested only twice per calendar year. The Complete Guide to 529 College Savings Plans has more.
• Custodial accounts can hold almost any fund or stock your brokerage offers, which makes them a natural home for FXAIX or a similar fund. The money becomes your child’s to control at the account’s termination age. See UTMA vs. UGMA: What’s the Difference?
• Custodial Roth IRAs usually offer the same menu as the brokerage’s other accounts, and because qualified withdrawals are tax-free, a low-cost index fund held for decades is a natural fit. Contributions are limited to your child’s earned income. See The Custodial Roth IRA and What Qualifies as “Earned Income” for a Minor’s Roth IRA?
• Trump Accounts make index investing the rule. Under IRS Notice 2025-68, until January 1 of the year your child turns 18, the account can hold only mutual funds or ETFs that track an index of mostly U.S. companies, don’t use leverage, and charge no more than 0.1% a year. Treasury’s July 1, 2026 announcement named the State Street SPDR Portfolio S&P 500 ETF (SPYM) as the default, plus four other ETFs (IVV, VTI, SPTM, and ITOT) that parents would be able to choose once Treasury makes investment elections available. FXAIX isn’t on the list. See The 530A Trump Account Explained.
• Teen brokerage accounts at some firms let 13- to 17-year-olds place their own trades with a parent’s oversight. Teen Brokerage Accounts vs. Custodial Accounts compares the options.

Room for a little stock picking

None of this means a child should never own an individual stock. Owning a small piece of a company they know, such as the maker of their favorite game or sneakers, can make the market feel real in a way a fund statement can’t. The key is to keep it small and treat it as a lesson rather than the plan.

One simple approach is a learning slice. The index fund holds the core of your child’s savings, and a small, fixed amount, such as part of their birthday money or a set share of the account, is theirs to research and invest. Fractional shares make that practical with small sums. As FINRA’s guide to investing in fractional shares explains, firms that offer them let you buy part of a share by dollar amount, so $20 can buy a slice of a company whose shares cost hundreds. FINRA also flags a catch: fractional shares currently can’t be transferred to another brokerage firm, so moving the account later may mean selling them first, which could be taxable in a custodial account.

The real lesson comes from keeping score. Once a year, compare how your child’s picks did against the same money in the S&P 500 fund over the same period, and talk about why. Some years the picks will win, and that’s part of the lesson, too: the question is whether your child could count on winning for 18 years straight. A custodial account or a teen brokerage account is the natural place for the experiment, since 529 plans and Trump Accounts don’t offer individual stocks.

How to set it up

Here’s the whole strategy as a checklist:

• Match each goal to an account. College money usually goes in a 529, while longer-range money may go in a custodial account, a custodial Roth IRA, or a Trump Account. Comparing Investment Accounts for Kids lays out the options.
• Choose one broad, low-cost index fund as the core. An S&P 500 or total U.S. market fund with an expense ratio well under 0.1% is a strong start. In a 529, pick the plan’s index-based option.
• Turn on automatic contributions and dividend reinvestment. Investing on a schedule removes the temptation to time the market.
• Invest gifts as they arrive. Funds with no minimum, and fractional shares, let even small gifts go to work right away.
• Check in once or twice a year, not every day. Rebalance if your mix has drifted, and resist trading on headlines.
• Move money toward bonds and cash as each goal nears. An all-stock index fund is for money with years to grow.
• Add a learning slice if your child is curious. Keep it small, and compare it with the index every year.

Gifts from family fit neatly into this plan. When grandparents, aunts, uncles, and friends want to give for a birthday or a holiday, GoodNest can collect their gifts, often alongside a small keepsake. Guests give from your child’s GoodNest page and send the money straight to you by Zelle, Venmo, or PayPal. GoodNest never holds or invests it, so you decide where each gift goes, such as the index fund in your child’s 529 or custodial account. The GoodNest Guide to Asking for Investments Instead of Toys has ideas for starting that conversation.

The bottom line

For a child’s long-term money, the evidence points one way. Most professional stock pickers trail the index over periods as long as a childhood, individual stocks are a lopsided bet, frequent trading costs money and creates taxes, and fees compound quietly every year the money is invested. A low-cost index fund avoids all four problems at once. It’s telling that the law creating Trump Accounts requires low-cost index funds during childhood.

So build the core from one or two broad index funds, automate contributions, invest gifts as they come, and leave it alone. If your child wants to pick stocks, let them, with a small slice and a yearly scorecard. And as each goal gets closer, move that money toward safety. For how this fits with bonds, cash, and glide paths, return to The GoodNest Guide to Investment Strategies & Portfolio Allocation.

Frequently asked questions

Is FXAIX a good fund for a child’s investment account?

It’s one of the cheapest ways to own the S&P 500, with a 0.015% expense ratio and no minimum, so it can make a strong core holding in a Fidelity custodial account or custodial Roth IRA. Inside a 529 plan you choose from the plan’s own portfolios, and a Trump Account is limited to Treasury’s approved ETFs, which don’t include FXAIX. At other brokerages, a similar low-cost S&P 500 fund or ETF is usually simpler. Because it holds only large U.S. companies, money you’ll need within a few years belongs in bonds or cash instead.

Should I let my child pick individual stocks?

In moderation, it can be a great lesson. A small learning slice, such as part of their birthday money, lets a child research and own companies they know while an index fund holds the core of their savings. Once a year, compare the picks with the same money in an S&P 500 fund. Keep the experiment in a custodial or teen brokerage account, since 529 plans and Trump Accounts don’t offer individual stocks.

Is an S&P 500 fund or a total stock market fund better for a child?

Either can work as a core holding. The S&P 500 covers more than 80% of the U.S. stock market, according to S&P Dow Jones Indices, and a total market fund adds the mid-sized and smaller companies it leaves out. Treasury’s Trump Account lineup includes both kinds. Over a child’s long horizon, low costs and staying invested matter more than which of the two you pick.

Can an index fund lose money?

Yes. An index fund rises and falls with the stocks in its index, and the S&P 500 lost 36.55% in 2008, dividends included. Over long stretches it has been more forgiving: it didn’t lose money in any of the 81 overlapping 18-year periods from 1928 through 2025. History isn’t a guarantee, though, so money you’ll need within a few years should move toward bonds and cash.

Do actively managed funds ever beat the index?

Some do in any given period. In the first half of 2026, 32.82% of large-cap U.S. stock funds beat the S&P 500. But the share that keeps winning shrinks with time: over 20 years, 92.61% trailed it, and only 0.46% of the stock funds that ranked in the top quarter of their categories in 2021 stayed there every year through 2025. The hard part is picking the winners in advance.

Sources

• S&P Dow Jones Indices, “SPIVA U.S. Scorecard Mid-Year 2026” (data as of June 30, 2026).
• U.S. Securities and Exchange Commission, Investor.gov, “Index Funds” (accessed October 2, 2026).
• Lei Li, Investment Company Institute, “Trends in the Expenses and Fees of Funds, 2025” (ICI Research Perspective, March 2026).
• ETF Trends, “S&P Persistence Scorecard Reveals Universal Struggles for Active Strategies” (May 2026).
• Warren Buffett, Berkshire Hathaway 2017 letter to shareholders (February 2018).
• Hendrik Bessembinder, “Do Stocks Outperform Treasury Bills?” (Journal of Financial Economics, 2018).
• Brad M. Barber and Terrance Odean, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” (Journal of Finance, April 2000).
• Jeffrey Ptak, Morningstar, “Mind the Gap US 2026” (August 6, 2026).
• Internal Revenue Service, “Topic No. 409, Capital Gains and Losses” (accessed October 2, 2026).
• Internal Revenue Service, Revenue Procedure 2025-32, inflation adjustments for 2026 (2025).
• 24/7 Wall St., “Fidelity 500 Index Fund (FXAIX): What Investors Should Know” (August 24, 2026).
• Bankrate, “7 Best S&P 500 Index Funds in 2026” (accessed October 2, 2026).
• ETF Trends, “Report: Both Mutual Fund & ETF Fees Declined Again in 2025” (March 2026).
• Aswath Damodaran, NYU Stern School of Business, “Historical Returns on Stocks, Bonds and Bills” (annual data from 1928 through 2025, updated January 5, 2026).
• U.S. Securities and Exchange Commission, Investor.gov, “An Introduction to 529 Plans” (accessed October 2, 2026).
• Saving for College, “Understanding 529 Investment Options” (accessed October 2, 2026).
• Kathryn Flynn, Saving for College, “How Many 529 Plan Investment Changes Can You Make Per Year?” (updated October 12, 2021).
• Internal Revenue Service, Notice 2025-68, guidance on Trump Accounts (December 2025).
• U.S. Department of the Treasury, “Treasury Announces Investment Lineup for Trump Accounts” (July 1, 2026).
• FINRA, “Investing in Fractional Shares” (June 26, 2025).

This article is for general educational purposes only and is not investment, tax, or legal advice. Funds are named as examples, not recommendations. Historical returns and fund figures come from the sources cited and don’t predict future results, and investing involves risk, including possible loss of principal. Expense ratios, minimums, and account rules can change, so confirm the details with your fund company, your plan, or a qualified professional. GoodNest does not provide tax, legal, or investment advice and does not hold or invest funds.