Would Americans seeking out more aggressive returns do well to ditch their index funds and jump into prediction markets?
We wouldn’t bet on it — but the why is just as important as the answer itself.
That’s because many folks are being drawn to do just that: enhance their “investment” returns by allocating some of their money to the likes of Kalshi and Polymarket.
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Unlike traditional gambling, in which you make an all-or-nothing wager on an outcome, prediction markets allow you to buy and sell yes-or-no contracts based on the likelihood of something occurring. It’s a system that much more closely mirrors traditional equity and bond trading; indeed, these contracts are federally regulated financial derivatives.
It’s a tempting proposition given the seeming simplicity of what you can bet on. Which political party will win more House seats? Will the U.S. confirm whether aliens exist? Which musical artist will Spotify rank No. 1 in 2026?
But for several reasons, prediction markets should not be viewed as a realistic substitute for traditional markets.
Today, we’ll talk about why people are generally better off owning index funds than betting on everything.
Younger generations are hungry for bigger returns
Over the past few years, the stock market has done just about everything it can to make its case for prospective investors.
Over the past half-century, the S&P 500 has delivered an average annual total return (price plus dividends) of just under 12%. However, in six of the past seven years, it has generated a much bigger annual return of 17.25%.
If we invested $10,000 into an S&P 500 fund, earned 17.25% a year for 40 years, and never contributed another dime, that nest egg would still grow to $5.8 million, which is about four to five times what experts say people need to retire.
Even then, younger people are still looking for riskier ways to get more bang for their buck.
A 2026 Scripps News poll shows that just 19% of Americans have placed a prediction-market wager, but that’s highly concentrated among younger generations: 37% of Generation Z and 31% of millennials have used these platforms.
We can ascribe at least part of this to the tendency of younger generations to have both a higher risk tolerance and an openness to new technologies. In Northwestern Mutual’s 2026 Planning & Progress Study, Americans were asked, “Which best describes your typical approach to new and emerging investment trends?” Consider the percentages of millennials and Gen Zers that answered either “first mover” or “fast follower” compared to the overall population:
|
Approach |
U.S. Adults |
Gen Z |
Millennials |
Gen X |
Boomers+ |
|
First mover |
8 % |
15 % |
12 % |
5 % |
<1% |
|
Fast follower |
14 % |
19 % |
20 % |
14 % |
4 % |
But this is hardly the carelessness of youth. That same survey indicates that the push into higher-risk assets is being fueled by financial stress:
“A sizeable number of Americans — particularly young adults — are investing in or are considering investing in high-risk/speculative assets such as prediction markets, sports betting, and cryptocurrencies. Among those using or considering these financial instruments, 73% say they’re doing so because they feel financially behind and think those investments offer a faster path to their goals than traditional methods. And among Gen Z, the number is 80%.”
But there are two mighty good reasons to believe prediction markets are a shortcut to nowhere.
The “Wall Street Casino” vs gambling
Before we even get into the numbers, let’s just take a practical look at what you’re actually getting when you put your money to work in index funds or prediction markets.
Investing is frequently compared to gambling because of its element of the unknown — in truth, none of us know how a stock will perform one day to the next. Even some gambling terminology is commonplace in investment coverage. Pundits will casually talk about which stocks to “bet” on. Large, dependable companies are referred to as “blue chips.”
Warren Buffett himself, in Berkshire Hathaway‘s (BRK.B) 2023 annual report (PDF), wrote, “For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young.” It was just one of numerous references made by Buffett and former Berkshire vice chairman Charlie Munger to the difference between investors (those who thoughtfully build wealth by purchasing assets for the long run) and speculators (those who make short-term gambles with no regard to their investments’ true value).
(Image credit: Getty Images)
But someone purchasing an S&P 500 index fund — even if it’s a speculative short-term move — are still purchasing something with value.
When you purchase corporate stock, you buy a tiny share of ownership in that company. The value of that share is influenced by the market’s view of that company’s ability to grow in the future, sure. But it’s backed by very real revenues, profits and assets. And when you purchase an S&P 500 fund, you’re buying ownership indirectly, across many more companies.
Again, unlike a traditional wager, a prediction-market bet does have value between when you place it and when the triggering event occurs. You can buy a “yes” contract for, say, $5, and theoretically sell it back for $6, $4, $5, or some other value depending on changes to the perceived likelihood of that event occurring.
The problem is, what you’re buying still has no actual worth beyond, well, belief. There are no profits, no cash, no physical properties backing the value of that bet — just the intense conviction that New York’s highest temperature on September 21 will be between 70 and 71 degrees. (I wish I were joking.)
Two other things to consider:
- Deadline risk: Prediction-market bets generally have definite endpoints. Something must happen by a specific date, usually no longer than a year into the future, and often just weeks or even days. With an index fund, your results aren’t tethered to a specific date — if you’re wrong about the short-term direction of the market, but right about the long-term direction, you still “win.”
- Zeroing risk: Both stocks and prediction-market bets can go to zero. But whereas every single prediction-market wager will have one side that must go to zero, many stocks will never go to zero (at least within our lifetimes) — and the pathway to zero for a stock is likely to take much more time than a prediction-market bet, giving you more opportunity to exit with at least some of your value.
Index funds vs prediction markets, by the numbers
If that’s not enough to convince you that prediction markets are a bad investment bet, perhaps performance numbers will.
The Pew Research Center collected a sample of about 12,000 Polymarket accounts that placed trades on 10 specific high-volume events earlier this year, then analyzed their trading activity between May 7 to June 19.
Two key performance findings:
- “The average trader spent a little over $600 on the site, with a net loss of less than $2.” So, the average user lost money.
- “More than half of traders (58%) gained or lost less than $100.” Most people’s performance fell between +17% and -17% (assuming ~$600 wagered).
- 18% of people won $100 or more, while 24% of people lost $100 or more.
How does that compare to index-fund investors?
It’s not quite fair to just cite the S&P 500’s average annual performance and call it a day. Most investors don’t hold just the S&P 500 — they hold other funds and other assets, not to mention they’ll often buy and sell throughout the year.
Instead, we look to DALBAR, an independent research, rating, and auditing firm. Each year, they release a Quantitative Analysis of Investor Behavior (QAIB) report comparing actual average investor returns against popular benchmarks.
In 2024, DALBAR found that the average equity investor earned 16.54%, compared to an S&P 500 return of 25.02%. That 848-basis-point gap was the second-largest in the past decade. Then in 2025, the gap shrank to just 72 basis points — 17.88% for the S&P 500 and 17.16% for the average equity investor. That was the third-smallest gap since 1985, and the lowest since 2012.
Let’s apply those two near-extremes to the S&P 500’s 50-year average of 11.87% in two ways:
- Basis-point gap: If we assume investors would earn between 848 basis points and 72 basis points less than the S&P 500, that means over the past 50 years, the average investor has earned between 3.39% and 11.15% annually.
- Percentage gap: On a percentage basis, the average equity investor earned 66% of the S&P 500’s returns in 2024 and 96% in 2025. Applying those numbers to the long-term mean, the average investor has earned between 7.83% and 11.39% annually.
Both of those outcomes look much better than an average loss of a couple of bucks.
We certainly don’t blame anyone, regardless of age, for looking to ratchet up their returns. Americans face near-term cost concerns around rising food, fuel and housing prices, as well as growing uncertainty about retirement savings and Social Security solvency.
But there’s little to show that prediction markets are a good bet to help the average person overcome those hurdles. And there’s plenty of information outside of what we’ve been able to cover here that suggests trying to bet your way to financial success — whether in traditional wagers or more modern prediction contracts — could cause more problems than it solves.