While data supports the widespread belief that passive (or index) and ETF investing offer consistently competitive returns, a recent article in Money magazine advises investors to avoid three common mistakes when choosing this route:

Assuming all index funds are cheap: Index funds are generally able to charge lower fees since they simply buy the stocks or bonds that make up their benchmark indices (instead of spending money on manpower and research). But the article argues that not all of these funds are “bargains,” and fees can range from as little as 0.10% annually to more than 10 times that amount. It’s important to determine what fees you will be paying and compare to similar funds that track the same benchmark.

Playing the “niche index game”: An advantage of index investing is that it allows easy and inexpensive diversification. However, many investors fall into the “trap” of believing that “the more bases they cover…the better off they’ll be”. Diversity is a good thing, but overdoing it isn’t. Sticking to established index funds that track wide areas of the market is a better strategy.

Using index funds to gamble rather than invest: The original idea behind these funds was to track the performance of broad market indices like the S&P. Since outperforming the market is difficult, attempting to match market returns made sense. But today, many investors see index funds as a way to “make bets on a sector they believe is poised to soar”, especially in the case of ETFs (since they are priced constantly throughout the day and can be traded like stocks). But this requires the ability to know where the market or specific sectors are headed, a “dubious assumption at best.”