Has anyone ever lost money on index funds?
All investments carry risk. An index fund, like anything else, can potentially lose value over time. That being said, most mainstream index funds are generally considered a conservative way to invest in equities (although there are lesser-known index funds that are thought to carry greater risk).
As with all investments, it is possible to lose money in an index fund, but if you invest in an index fund and hold it over the long-term, it is likely that your investment will increase in value over time.
While they offer advantages like lower risk through diversification and long-term solid returns, index funds are also subject to market swings and lack the flexibility of active management.
And while theoretically possible, the entire US stock market going to zero would be incredibly unlikely. It would, in fact, take a catastrophic event involving the total dissolution of the US government and economic system for this to occur.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
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.
Wealthy investors can afford investments that average investors can't. These investments offer higher returns than indexes do because there is more risk involved. Wealthy investors can absorb the high risk that comes with high returns.
In 2002, the fallout from frenzied investments in internet technology companies and the subsequent implosion of the dot-com bubble caused the S&P 500 to drop 23.4%. And in 2008, the collapse of the U.S. housing market and the subsequent global financial crisis caused the S&P 500 to fall 38.5%.
The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.
The short answer is a resounding yes. Let's take a look at why this is. While past investment performance doesn't guarantee future results, the return of S&P 500 index funds has been about 9% to 10% annualized per year over long periods, depending on the exact timeframe you're looking at.
Are index funds safe during recession?
The important thing to remember about index funds is that they should be long-term holds. This means that a short-term recession should not affect your investments.
Basic Info. S&P 500 10 Year Return is at 174.1%, compared to 171.8% last month and 162.1% last year. This is higher than the long term average of 114.2%.
If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment.
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.
In the case of a stock index fund, for example, every stock would have to go to zero for the index fund, and thus the investor, to lose everything. So while it's theoretically possible to lose everything, it doesn't happen for standard funds.
It's extremely unlikely you'll earn 10% returns every single year, but the annual highs and lows have historically averaged out to roughly 10% per year over several decades. Over a lifetime, it's possible to earn over half a million dollars with just $100 per month.
While it's true that index funds have historically provided solid returns, it's important to remember that past performance is not a guarantee of future results. Blindly putting all of your savings into index funds without considering other investment options or your personal financial goals could be a mistake.
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.
Exchange-traded funds (ETFs) and index funds are similar in many ways but ETFs are considered to be more convenient to enter or exit. They can be traded more easily than index funds and traditional mutual funds, similar to how common stocks are traded on a stock exchange.
So, why does Buffett only recommend index funds? Because it's the best possible choice, "on an expectancy basis," as he put it. In other words, buying an index fund has a higher expected return than buying any single individual stock or actively managed mutual fund.
Do billionaires own 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.
However, like all speculative assets, you should make sure that individual stocks only make up the speculative part of your portfolio. Invest in these assets with money you can afford to lose. For the long-term, stable segment of your portfolio, index funds are often an excellent idea.
Our recommendation for the best overall S&P 500 index fund is the Fidelity 500 Index Fund. With a 0.015% expense ratio, it's the cheapest on our list. And it doesn't have a minimum initial investment requirement, sales loads or trading fees.
Index funds are generally considered safe because they don't rely too much on the performance of any individual stock, and they also don't rely on the competence of investment managers as actively managed mutual funds or hedge funds do.
The lowest annual return over any 30 year period going back to 1926 was 7.8%. That's what you got had you invested at the peak of the Roaring 20s boom in September 1929. You would have lost more than 80% of your investment in the ensuing crash and still made more than 850% in total over 30 years.
