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You may have heard that you can simplify your investment strategy just by owning index-based or passive investments. But is this a good idea? You’ll want to consider the different aspects of this type of investment style.

To begin with, an index-based investment is a vehicle such as a mutual fund or an exchange-traded fund (ETF) that mimics the performance of a market benchmark, or index — the Dow Jones Industrial Average, the S&P 500, and so on. (An ETF is similar to a mutual fund in that it holds a variety of investments but differs in that it is traded like a common stock.) You can...