Do index funds ever lose money?
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.
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).
Index funds track portfolios composed of many stocks or bonds. As a result, investors benefit from the positive effects of diversification, such as increasing the expected return of the portfolio while minimizing the overall risk.
According to the latest S&P Dow Jones Indices SPIVA research report, 92-95% of actively managed funds failed to beat their passive index benchmarks over a 15-year period.
While performance is never guaranteed, index funds tend to provide more stable and predictable returns over a long-term horizon. Financial advisors have long espoused the long-term benefits of holding index funds for average investors.
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.
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.
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.
Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).
- 9 Safest Index Funds and ETFs to buy in 2024. ...
- Vanguard S&P 500 ETF (VOO 0.84%) ...
- Vanguard High Dividend Yield ETF (VYM 0.29%) ...
- Vanguard Real Estate ETF (VNQ 0.3%) ...
- iShares Core S&P Total U.S. Stock Market ETF (ITOT 0.76%) ...
- Consumer Staples Select Sector SPDR Fund (XLP 0.72%) ...
- iShares 0-3 Month Treasury Bond ETF (SGOV 0.02%)
Do index funds double every 7 years?
According to Standard and Poor's, the average annualized return of the S&P index, which later became the S&P 500, from 1926 to 2020 was 10%. 1 At 10%, you could double your initial investment every seven years (72 divided by 10).
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.
So if you're happy with a portfolio that performs comparably to the stock market as a whole, then sticking to S&P 500 ETFs alone isn't a bad idea. However, if you assemble a portfolio of individual stocks that perform better, you might enjoy a 12% or 15% return over time -- or more.
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.
Regardless of what any financial advisor says, every single stock and index fund on the market can lose. That's the risk you must accept when putting money into the stock market. However, index funds allow you to minimize that risk.
Over the long term, index funds have generally outperformed other types of mutual funds. Other benefits of index funds include low fees, tax advantages (they generate less taxable income), and low risk (since they're highly diversified).
Investors who buy index funds will not lose all of their investment. That's because they're investments buoyed by hundreds or thousands of underlying securities. As such, they're highly diversified, making it almost impossible for them to reach a value of zero.
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. » Learn more about purchasing power with NerdWallet's inflation calculator.
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.
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
How much is $500 a month invested for 10 years?
| Years Invested | Balance At the End of the Period |
|---|---|
| 10 | $102,422 |
| 20 | $379,684 |
| 30 | $1,130,244 |
| 40 | $3,162,040 |
If the S&P 500 outperforms its historical average and generates, say, a 12% annual return, you would reach $1 million in 26 years by investing $500 a month.
Buffett's favorite ETF
portfolio: the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and the Vanguard 500 Index Fund ETF (NYSEMKT: VOO). Both are index ETFs that track the S&P 500.
Ramsey says index mutual funds can be a better buy than ETFs. Ramsey suggested that if you do want to engage in passive investing, you're better off doing it with an index mutual fund than with an ETF that tracks a market or financial index.
In 2007, Buffett bet a million dollars that over the course of a decade, a simple S&P 500 index fund would outperform a basket of hand-picked hedge funds. He picked the Vanguard 500 Index Fund Admiral Shares (VFIAX). Hedge fund manager Ted Seides from Protégé Partners accepted the bet and picked five funds-of-funds.
