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...