Understanding Index Funds with Benji Bailey

Mar 20, 2025

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Did you hear about the guy who owned last year’s top-performing funds? Yeah, it's too bad he bought them this year, though.

There’s a lot of evidence to suggest that buying and holding index funds will pay off in the long run. Benji Bailey joins us today to make the case with some impressive numbers.

Benji Bailey is Vice President of Investments and Senior Fixed Income Manager at Praxis Mutual Funds, an underwriter of Faith & Finance.

The Importance of Indexes in Investing

To understand index funds, we can view them like guideposts in a national park. Just as signs direct visitors to scenic views and help them stay on the right path, indexes serve as essential benchmarks for investors. These benchmarks, such as the S&P 500 for large-cap stocks or the Bloomberg Aggregate for bonds, allow investors to measure their progress toward financial goals.

Without these guideposts, investors risk straying off course, possibly realizing too late that their portfolio has been heading in the wrong direction. Publicly available indexes provide a crucial check-in, ensuring investments align with long-term objectives.

Many investors believe they can outperform the market by actively trading stocks. However, research suggests otherwise. A study published in The Journal of Finance found that individuals who frequently traded stocks underperformed compared to those who traded less.

Over a six-year period:

The market returned approximately 18% annually.
Less active traders saw returns of around 16.4%.
The most active traders only achieved 11.4%, underperforming by over 6%.

This trend highlights the dangers of excessive trading. Warren Buffett summarized it well: “The stock market is designed to transfer money from the active to the patient.” The Bible echoes this wisdom in Proverbs 13:11: “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”

Active vs. Passive Mutual Funds

A key distinction in investing is the difference between active and passive mutual funds:

Active funds: Managed by professionals who handpick a smaller set of stocks, hoping to outperform the market.
Passive funds: Designed to mirror an index, holding a broad range of stocks for stable, long-term growth.

According to Morningstar, over the past 15 years, only 9% of actively managed large-cap funds outperformed their passive counterparts—meaning 91% of active funds underperformed. This data suggests that passive investing can be a more reliable strategy for many investors.

Aligning Investments with Faith Values

Many faith-driven investors worry that traditional index funds may include companies whose values don’t align with their beliefs. Praxis Mutual Funds addresses this concern by screening out companies involved in industries such as:

Alcohol
Tobacco
Gambling
Abortion-related businesses

However, the more companies an investor removes from an index, the greater the potential for volatility in returns. For example, removing just one company from the S&P 500 would have little impact, but excluding half of the index’s stocks would significantly increase volatility.

Praxis Mutual Funds utilizes an optimized equity index strategy to balance faith-based values with financial performance. Instead of replicating an index, Praxis screens out objectionable companies and uses a software-driven approach to reallocate funds into a diversified mix that closely tracks the market’s performance.

This method allows faith-based investors to remain aligned with their values without sacrificing reasonable returns.

The Role of Patience in Investing

Market volatility can make investing an emotional challenge. Many investors instinctively buy when the market is high and sell when it’s low—precisely the opposite of what leads to long-term success.

Historical data shows that the S&P 500 has had an average annual return of around 10% over the past 97 years, but actual yearly returns rarely fall near that average. Investors who stay the course and focus on long-term gains are more likely to benefit from market growth.

The Bible encourages this patient approach in Ecclesiastes 11:2: “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” Diversification and patience are essential principles for wise investing.

Making a Positive Impact Through Investing

Beyond screening out specific companies, Praxis Mutual Funds takes an active role in making a positive impact through:

Proxy voting: Ensuring shareholder influence aligns with faith values.
Shareholder engagement: Advocating for ethical corporate practices.
Community development investing: Allocating 1% of funds to microfinance and social impact projects.

Faith-based investing is about more than avoiding harmful industries; it’s also about using investment dollars to create meaningful, Christ-centered change in the world. Whether through index funds or faith-based investment strategies, the goal is to align financial decisions with biblical principles.

As Proverbs 21:5 reminds us: “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.” A well-planned investment strategy, guided by faith and patience, can lead to lasting financial fruitfulness.

For those interested in learning more about faith-based investing, Praxis Mutual Funds provides a wealth of information at PraxisInvests.com.

On Today’s Program, Rob Answers Listener Questions:

As the executor of my deceased relative's estate, do I need to report my role to FinCEN, similar to reporting the controlling party of a company?
I'm 85, and I draw Social Security. I used to do side jobs, and when I filed my taxes because of the side jobs, my CPA told me I don't need to file taxes anymore since I'm on Social Security. Now I'm hearing they're talking about cutting taxes on Social Security, so I'm confused. Do I still need to file taxes if Social Security is my only income?

Resources Mentioned:

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