Index Funds vs Actively Managed Funds: What Physicians Actually Earn

The numbers are painfully clear: most physicians who rely on actively managed funds are overpaying for underperformance.

The empirical scorecard: index vs active

Strip out marketing and anecdotes. Look at data.

Across decades, broad-based index funds have outperformed the vast majority of actively managed funds, especially after fees and taxes. For a high-income physician facing high marginal tax rates, that gap widens further.

Let’s anchor on three concrete data sets:

1. SPIVA (S&P Indices Versus Active) – the industry-standard scorecard comparing active funds to indexes.
2. Morningstar and Vanguard fee studies – how expenses translate into net returns.
3. Historical S&P 500 and bond index returns – the baseline for “simple” indexing.

From SPIVA U.S. Scorecard (20-year period, through 2023):

• About 90–95% of U.S. large cap active funds underperformed the S&P 500.
• About 80–90% of U.S. mid and small cap funds underperformed their benchmarks.
• Survival bias matters: a significant fraction of underperforming funds are merged or liquidated, so the real failure rate is even higher.

That is not a close contest.

Now tie that to what a typical physician portfolio looks like.

Say you have a 60/40 stock–bond allocation, with:

• Stocks: 70% U.S., 30% international
• Bonds: investment-grade core bond funds

You can build that entire allocation with index ETFs or low-cost index mutual funds at 0.03–0.10% annual expense. Or you can pay 0.75–1.50% for actively managed mutual funds. Or worse, ~1.0% AUM advisor fee + 0.75–1.00% fund fees.

The performance difference is mostly fees dragging returns down. The data is not subtle.

Typical Annual Cost Comparison for Physician Portfolios

Category	Value
Low-cost index	0.07
Active mutual funds	0.9
Active + AUM advisor	1.8

That bar chart looks trivial. A percent here, a percent there. But compound it over 20–30 years on a seven-figure portfolio and it becomes the dominant variable in what you actually walk away with.

What physicians actually earn: realistic return scenarios

Let me quantify what this looks like for a real physician career.

Assumptions (deliberately conservative):

• Starting portfolio: $0 at age 32 (just out of training)
• Annual investment: $75,000 (combination of 401(k), backdoor Roth, taxable)
• Investment horizon: 28 years (age 32 to 60)
• Nominal gross market returns (before fees):
  • Stocks: 9%
  • Bonds: 4%
  • Portfolio: 60% stocks, 40% bonds → blended ~7.4%

We will compare three strategies:

1. Index portfolio – DIY or low-cost advisor
   • Weighted expense ratio: 0.07%
   • No AUM advisor fee
2. Actively managed funds – no advisor
   • Weighted expense ratio: 0.90%
3. Actively managed funds + 1.0% AUM advisor fee
   • Total all-in cost: 1.90% (0.90% fund + 1.0% advisor)

Net expected returns (7.4% gross):

• Index: ~7.33% (7.40 – 0.07)
• Active: ~6.50% (7.40 – 0.90)
• Active + AUM: ~5.50% (7.40 – 1.90)

Run the math on future portfolio values with level annual contributions. Rounded values:

• Index at 7.33%: ≈ $6.1 million
• Active at 6.50%: ≈ $5.0 million
• Active + AUM at 5.50%: ≈ $4.0 million

You read that correctly: same physician, same savings, same markets, different fee structures – the difference between low-cost indexing and the full “active + advisor” package is in the $2 million range by age 60.

Projected Portfolio at 28 Years by Strategy

Category	Value
Index (0.07%)	6100000
Active (0.90%)	5000000
Active + AUM (1.90%)	4000000

That is what physicians actually earn. Not the brochure returns. The fee-adjusted reality.

Someone will say, “But what if I pick a top-quartile active fund?” Statistically, you will not. The data from SPIVA and Morningstar are brutal on this point: past top-quartile performance is a terrible predictor of future top-quartile performance.

The fee drag: small percentages, huge dollar amounts

Physicians underestimate just how corrosive fees are. Because the statements show percentages, not the lifetime cash impact.

Let’s look at a simpler, static case:

• Portfolio: $2,000,000
• Gross market return: 7.0%
• Time horizon: 20 years
• No additional contributions or withdrawals

Compare three annual cost levels: 0.05%, 0.75%, 1.75%.

Approximate terminal values:

• 7.0% gross, 0.05% fee → 6.95% net → ≈ $7.7M
• 7.0% gross, 0.75% fee → 6.25% net → ≈ $6.7M
• 7.0% gross, 1.75% fee → 5.25% net → ≈ $5.5M

A 1.7% fee difference cuts roughly $2.2M from your ending balance on that $2M nest egg over 20 years.

Impact of Annual Fees on $2M Over 20 Years

Category	0.05% fee	0.75% fee	1.75% fee
0 years	2000000	2000000	2000000
5 years	2810000	2690000	2520000
10 years	3950000	3620000	3180000
15 years	5550000	4880000	4020000
20 years	7700000	6700000	5500000

You do not see a $2.2M invoice. You see a line item that says 1.75% and a bland performance report.

This is why, when I look at actual physician accounts:

• A Vanguard three-fund index portfolio from a disciplined DIY physician
• Versus a comparable “professionally managed” active portfolio with a name-brand advisor

The DIY portfolio is almost always hundreds of thousands of dollars ahead by mid-career, and often seven figures ahead by late career.

Risk, volatility, and the illusion of protection

The sales pitch you hear: “Active managers can protect you in downturns.” The data: mostly they do not.

During major drawdowns (e.g., 2008, Q1 2020), SPIVA data show that:

• A large majority of active equity funds still underperformed their benchmarks over the full cycle that includes the crash and recovery.
• Many funds that lost “slightly less” in the crisis then lagged badly in the rebound, ending up behind even on a 3–5 year view.

The problem is structural:

• If a fund keeps substantial cash or defensive positions, it may cushion downside but it also systematically lags during bull markets.
• If it stays nearly fully invested (which most do), its ability to sidestep big drawdowns is limited. Managers are not allowed to sit in 50–80% cash for years.

Net result over a full cycle: the volatility is similar, the return is lower, and you pay more tax in taxable accounts from higher turnover.

From a statistical standpoint:

• Broad index funds are already extremely diversified.
• The biggest risk for most physicians is not “market volatility.”
• It is behavioral: panic selling, chasing performance, concentration in single stocks, or buying complex products they do not understand.

Active management does not cure that. In many cases, it amplifies it, because high-fee products require aggressive marketing and storytelling to justify their existence.

Taxes: the physician’s quiet leak

Physicians live in high marginal tax brackets and often in high-tax states. That makes tax efficiency non-negotiable.

Indexes have an inherent tax edge:

• Very low turnover (often <5–10% per year).
• Fewer capital gains distributions.
• You control when to realize gains by deciding when to sell.

Actively managed mutual funds:

• Higher turnover (can be 50–100%+ per year).
• Regular capital gains distributions, even when you did not sell.
• Short-term gains (taxed at ordinary income) more likely.

For a physician with, say:

• 37% federal marginal (ordinary)
• 20% federal long-term capital gains
• 3.8% NIIT
• 5–10% state tax

Every extra 1% of “tax-inefficient” return can easily cost 0.3–0.6% after tax per year.

So the real comparison for a taxable brokerage account is not:

• 7.3% index vs 6.5% active gross-of-tax

It is often closer to:

• 7.1–7.2% index vs 6.0–6.2% active after tax and fees

That widens the long-term gap again by another six figures plus.

What “winning” with active would actually require

Let’s be generous and ask: what would need to be true for a physician to come out ahead with active management?

You would need most of the following:

1. The manager must outperform the index before fees by more than the fee difference, on a persistent multi-decade basis.
2. You must identify that manager in advance, without the benefit of hindsight.
3. The strategy must stay open to new investors (many good ones close or change mandates).
4. The tax drag must not erase the edge in your specific account types.

Quantify it.

If your low-cost index portfolio returns 7.3% net, and your active portfolio costs 1.0% more per year, your active manager must deliver:

• 8.3%+ net to you, consistently, merely to match the index’s wealth outcome.
• That is a repeatable, consistent alpha of 1.0–1.5 percentage points per year over decades.

SPIVA and academic studies are brutal here: almost no funds deliver that kind of persistent, excess, after-fee, after-tax return. Outliers exist. But building your financial future assuming you are the one who found the rare outlier is not a rational, data-based bet. It is a lottery ticket.

How physicians actually invest (and where they go wrong)

I will give you a composite of what I see in real physician portfolios:

• 10–20 different funds and ETFs.
• Several overlapping large-cap growth funds (effectively all “S&P 500 plus fees”).
• A sprinkling of sector funds (tech, healthcare).
• Target date fund in a 401(k) plus random active funds in taxable.
• Expense ratios ranging from 0.6% to 1.4%.
• Sometimes a 1.0% AUM advisor fee on top.

When you consolidate the positions and run the factor exposure and style box analysis, 80–90% of the equity exposure behaves like a broad market index. The “tilts” are small, and often accidental.

Translation: most physicians are paying active prices for index-like exposure.

Index funds, on the other hand, are brutally transparent:

• You own the market.
• Your performance is exactly the market minus a tiny known fee.
• Your tracking error is negligible.

There is no confusion there.

Concrete comparison: sample fund lineups

Let’s compare, side by side, a typical index lineup versus a common “advisor-managed” active lineup I see over and over.

Category	Index Choice (ER)	Active Choice (ER typical)
US total stock	0.03%	0.85%
Intl total	0.07%	0.95%
US bonds	0.04%	0.70%
Intl bonds	0.09%	0.80%

Construct a 60/40 portfolio:

• 42% US stock, 18% international stock
• 28% US bonds, 12% international bonds

Weighted expense ratio:

• Index: around 0.05–0.06%
• Active: around 0.80–0.90%

On a $1M portfolio, annual explicit fund fees:

• Index: ~$500–$600
• Active: ~$8,000–$9,000

Add a 1% AUM fee:

• Total: $18,000–$19,000 per year.

Over 25 years, with compounding, that fee differential alone can exceed $500,000–$1,000,000.

Time and attention: physician bandwidth is finite

You spend your day managing risk, uncertainty, and decisions under pressure. Most physicians do not have 10 hours a week to research funds, read 200-page active fund prospectuses, and second-guess global macro forecasts.

Indexing aligns with reality:

• Low time requirement.
• Low decision load.
• Fewer “Should I sell this underperforming fund?” moments.

Active management invites churn:

• Why is this manager lagging?
• Should I switch to this “new” fund with a 5-star rating?
• Is my factor tilt still in favor?

Behaviorally, fewer moving parts is safer. The probability that you will sabotage your own plan is lower with a simple index portfolio than with a complex, story-driven active lineup.

Where active might make sense for a physician

The data strongly favor indexing for core public market exposure. That does not mean there is no room for anything else. But it should be deliberate and ring-fenced.

Reasonable exceptions:

1. True niche exposures
   Very specialized strategies unavailable in index form (e.g., certain private credit, micro-cap, or niche real estate funds), with a sensible allocation cap (say, 5–10% of net worth).

2. Employer retirement plans with bad menus
   Sometimes your 401(k)/403(b) offers no decent index option. In that case, you pick the least-bad active fund—typically one with:

   • Lowest expense ratio available
   • Broad diversified mandate (no gimmicky sector funds) Then offset that in IRAs/taxable with low-cost index funds.

3. Individual factor tilts
   If you know what you are doing statistically, you might tilt a portion of your equities to small/value or similar factors using systematic funds. That is technically “active,” but rules-based, not stock-picking. Most physicians are better off with pure market-cap indexing, but I will concede there is sound evidence for factor tilts when done cheaply.

What I do not consider reasonable, given the data:

• Paying 1% AUM plus 0.8–1.0% expense ratios to own a closet-index large-cap fund.
• Chasing last year’s 5-star funds in a taxable account as a high-income physician.

Practical blueprint: what to do tomorrow

You probably want a prescriptive path. Here is a data-driven one.

Step 1: Inventory your current all-in costs.

• List every fund and ETF you own.
• Record the expense ratio of each.
• If you have an advisor, add their AUM fee.
• Compute a weighted average.

If your all-in cost is north of 0.50%, you are almost certainly leaving large money on the table. Above 1.0% and the math is brutal.

Step 2: Compare 10-year performance to blended indexes.

Take your current portfolio and compare it to a simple 2–4 fund index benchmark with comparable risk (same stock/bond split). See which has higher after-fee performance.

In most cases I have seen, the simple index benchmark beats the physician’s real portfolio by 1–2 percentage points annualized over a decade.

Step 3: Shift your “core” to indexes.

• Make your 60–90% “core” holdings low-cost index funds or ETFs covering:
  • Total US stock
  • Total international stock
  • Total US bond (maybe some TIPS or international bonds if you prefer)

Step 4: If you want “spice,” cap it.

• Limit any high-fee or speculative active strategies to ≤10% of your portfolio.
• Treat that as entertainment or optional upside, not your retirement foundation.

Step 5: Re-check once a year.

• Rebalance to target allocation.
• Confirm that your weighted expense ratio has not crept up.
• Ignore most financial news.

Visualizing the physician investment journey

To close the loop, here is the typical path I see, mapped out:

Common Physician Investment Path: Active to Index

Step	Description
Step 1	Residency
Step 2	Early attending
Step 3	Meet advisor or rep
Step 4	Active fund portfolio
Step 5	High fees and mixed results
Step 6	Discovers indexing data
Step 7	Gradual shift to index funds
Step 8	Lower costs and higher net returns

You can skip steps C through E if you are paying attention now.

And to illustrate how your effective return changes as you reduce fees:

Net Expected Annual Return vs All-in Fee Level

Category	Value
0.05% fee	0.05,7.35
0.50% fee	0.5,6.9
1.00% fee	1,6.4
1.75% fee	1.75,5.65

Assuming 7.4% gross market return, every added 0.5–0.75% fee slices your net return meaningfully. Scale that over physician-sized portfolios and careers, and the conclusion is not ambiguous.

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Three key points, without sugarcoating:

1. Over full physician careers, low-cost index funds have overwhelmingly beaten actively managed funds on a net, after-fee, after-tax basis. The gap is often seven figures.
2. The main difference is not genius stock-picking vs mediocrity. It is cost structure and tax efficiency. High fees and turnover are a permanent headwind you never outrun.
3. If you want to know what physicians actually earn, stop reading marketing materials and SPIVA-proof your portfolio: make indexes your core, keep costs under control, and treat any active bets as strictly optional, not the main plan.