Has anyone ever lost money on index funds?
Can you lose money in an index fund? Of course you can. But index funds still tend to be an appealing choice for investors due to their built-in diversification and comparatively low risk. Just make sure to note that not all index funds always perform the same, and that now every index fund out there is low-risk.
The point isn't to compare active and passive strategies, but rather to make sure you understand that index funds aren't necessarily safe investments. You can lose money if investments in the index lose value. Since many of those indices are financial markets, you should expect them to go down from time to time.
But along with that comes slower gains than you may experience investing in individual stocks, options, crypto or other higher-risk investments. Remember, index funds are passively managed, so there's little chance to make quick adjustments and realize significant short-term gains.
Are Index Funds Safe Long-Term? The short answer is yes: index funds are still safe in the long term. Only the right index funds are safe. There may be some on the market that you want to avoid.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Even the top investors put their money in index funds.
In fact, a number of billionaire investors count S&P 500 index funds among their top holdings. Among those are Buffett's Berkshire Hathaway, Dalio's Bridgewater, and Griffin's Citadel.
No Control Over Holdings. Indexes are set portfolios. If an investor buys an index fund, they have no control over the individual holdings in the portfolio. You may have specific companies that you like and want to own, such as a favorite bank or food company that you have researched and want to buy.
Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition). To index invest, find an index, find a fund tracking that index, and then find a broker to buy shares in that fund.
Money does not offer advisory services. Since its creation more than four decades ago, one market invention has become a go-to for many everyday investors: the index fund. But recent research shows that index funds' popularity might actually reduce returns for investors over the long term.
Investing in funds, such as exchange-traded funds and low-cost index funds, is often less risky than investing in individual stocks — something that might be especially attractive during a recession.
Are index funds really worth it?
Transparency: Since they replicate a market index, the holdings of an index fund are generally well-known and consistent. Historical Performance: Over the long term, many index funds have been shown to outperform actively managed funds, especially after accounting for fees and expenses.
Ideally, you should stay invested in equity index funds for the long run, i.e., at least 7 years. That is because investing in any equity instrument for the short-term is fraught with risks. And as we saw, the chances of getting positive returns improve when you give time to your investments.
Lower risk: Because they're diversified, investing in an index fund is lower risk than owning a few individual stocks. That doesn't mean you can't lose money or that they're as safe as a CD, for example, but the index will usually fluctuate a lot less than an individual stock.
| Discount Rate | Present Value | Future Value |
|---|---|---|
| 4% | $1,000 | $2,191.12 |
| 5% | $1,000 | $2,653.30 |
| 6% | $1,000 | $3,207.14 |
| 7% | $1,000 | $3,869.68 |
With $1 million in a 401(k) and no mortgage on a $500,000 home, retirement at 60 may, in fact, be possible. However, retiring before eligibility for Social Security and Medicare mean relying more on savings. So deciding to retire at 60 calls for careful planning around healthcare, taxes and more.
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
| Stock | Number of Shares Owned | Value of Stake |
|---|---|---|
| Apple (NASDAQ:AAPL) | 915,560,382 | $168.3 billion |
| Bank of America (NYSE:BAC) | 1,032,852,006 | $33.2 billion |
| American Express (NYSE:AXP) | 151,610,700 | $27.3 billion |
| Coca-Cola (NYSE:KO) | 400,000,000 | $24.1 billion |
| Warren Buffett Portfolio | ||
|---|---|---|
| All time Stats (Since Jan 1871) | Return | +8.71% |
| Std Dev | 14.85% | |
| Max Drawdown | -79.29% | |
| Last Update: 31 January 2024 |
Buffett's favorite ETF
A -0.70%) (BRK. B -0.55%) portfolio: the SPDR S&P 500 ETF Trust (SPY 0.15%) and the Vanguard 500 Index Fund ETF (VOO 0.06%).
While not all of the households in this study are millionaires, the vast majority of them are. The median household in the study has over $1 million with Vanguard and those below the median have assets outside of Vanguard (i.e. real estate, non-Vanguard accounts, etc.) that make most of them millionaires as well.
What happens if Vanguard collapses?
The securities that underlie the funds are held by a custodian, not by Vanguard. Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
The average stock market return is about 10% per year, as measured by the S&P 500 index, but that 10% average rate is reduced by inflation. Investors can expect to lose purchasing power of 2% to 3% every year due to inflation.
ETFs are more tax efficient than index funds because they are structured to have fewer taxable events. As mentioned previously, an index mutual fund must constantly rebalance to match the tracked index and therefore generates taxable capital gains for shareholders.
Rowe Price U.S. Equity Research fund (ticker: PRCOX) is in this exclusive club, having bested—along with a team of about 30 research analysts—the S&P 500 index for the past five years on an annualized basis. U.S. Equity Research is a Morningstar five-star gold-medal fund.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
