Why index funds don't work?
While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.
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.
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.
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.
One of the main reasons is that some investors believe they can outperform the market by actively selecting individual stocks or actively managed funds. While this is possible, it is not easy, and many studies have shown that the majority of active investors fail to beat the market consistently over the long term.
Much of it, yes, but not entirely. In a broad-based sell-off of a market, the benchmark index will lose value accordingly. That means an index fund tied to the benchmark will also lose value.
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.
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.
It might actually lead to unwanted losses. Investors that only invest in the S&P 500 leave themselves exposed to numerous pitfalls: Investing only in the S&P 500 does not provide the broad diversification that minimizes risk. Economic downturns and bear markets can still deliver large losses.
The one time it's okay to choose a single investment
That's because your investment gives you access to the broad stock market. Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market.
Can you live off index funds?
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.
Broadly diversified index funds can be your investment vehicle for a ride to becoming a millionaire retiree, if the stock market performs as it has in the past. If you know little about investing and have no desire to learn more, you still can be a successful investor. That's because you have the power of index funds.
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.
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.
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.
Within the world of corporate governance, there has hardly been a more important recent development than the rise of the 'Big Three' asset managers—Vanguard, State Street Global Advisors, and BlackRock.
Some index funds provide exposure to thousands of securities in a single fund, which helps lower your overall risk through broad diversification. By investing in several index funds tracking different indexes you can built a portfolio that matches your desired asset allocation.
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.
- Vanguard Real Estate ETF (VNQ 0.23%) ...
- iShares Core S&P Total U.S. Stock Market ETF (ITOT 0.83%) ...
- Consumer Staples Select Sector SPDR Fund (XLP -0.09%) ...
- iShares 0-3 Month Treasury Bond ETF (SGOV 0.02%) ...
- Vanguard Utilities ETF (VPU 0.08%) ...
- iShares U.S. Healthcare Providers ETF (IHF 0.86%) ...
- Schwab U.S. TIPS ETF (SCHP -0.08%)
An S&P 500 index fund essentially lets investors diversify capital across many of the most influential companies in the world. Warren Buffett sees that diversity as a compelling reason to invest. He once described the S&P 500 as a "cross-section of businesses that in aggregate are bound to do well."
What does Warren Buffett invest in?
| 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 |
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%).
An S&P 500 index fund alone can absolutely achieve the growth needed to make you into a millionaire. But you probably don't want that to be your sole investment, particularly when you're close to retirement.
S&P 500: $100 in 1980 → $12,097.47 in 2023
This is a return on investment of 11,997.47%, or 11.61% per year.
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
