Are index funds good or bad?
The Bottom Line. Index funds are a popular choice for investors seeking low-cost, diversified, and passive investments that happen to outperform many higher-fee, actively traded funds.
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.
Investing in index funds is a great way to diversify your portfolio and achieve long-term growth. Index funds are simple, cost-efficient, and transparent investments that can offer you the best return on your money.
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.
The S&P 500, through index funds from the likes of Vanguard and SPDR, provides long-term returns that have historically outpaced inflation.
Index fund risks
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.
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.
To be sure, if you have the time, knowledge, and desire to create a portfolio of individual stocks, by all means, go for it. But even if you do own individual stocks, index funds can form a solid base for your portfolio. Index funds offer investors of all skill levels a simple, successful way to invest.
The biggest difference between investing in index funds and investing in stocks is risk. Individual stocks tend to be far more volatile than fund-based products, including index funds. This can mean a bigger chance for upside … but it also means considerably greater chance of loss.
Investment Accessibility: Invest in mutual funds via company or trade ETFs like stocks for added convenience. Cost and Performance: Index funds cost less, have lower taxes. Most prefer them for cost-effectiveness.
What if I invested $1000 in S&P 500 10 years ago?
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.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
![Are index funds good or bad? (2024)](https://i.ytimg.com/vi/0RNk7PvYf7w/hq720.jpg?sqp=-oaymwEcCNAFEJQDSFXyq4qpAw4IARUAAIhCGAFwAcABBg==&rs=AOn4CLDC3OIMBRVASNiaWaK3ScpP65Rg-g)
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
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).
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.
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.
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.
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.
- 9 Safest Index Funds and ETFs to buy in 2024. ...
- Vanguard S&P 500 ETF (VOO 0.1%) ...
- Vanguard High Dividend Yield ETF (VYM -0.04%) ...
- Vanguard Real Estate ETF (VNQ 0.22%) ...
- iShares Core S&P Total U.S. Stock Market ETF (ITOT 0.2%) ...
- Consumer Staples Select Sector SPDR Fund (XLP 0.24%) ...
- iShares 0-3 Month Treasury Bond ETF (SGOV 0.01%)
Buffett's thinking here is straightforward. Most non-professional investors (and even many professional stock-pickers) have very little chance of outperforming the market. But index fund investors get exposure to the entire U.S. market and can benefit from its historical upward trajectory — and for cheap.
Where do the richest people invest?
Rank | Asset | Average Proportion of Total Wealth |
---|---|---|
1 | Primary and Secondary Homes | 32% |
2 | Equities | 18% |
3 | Commercial Property | 14% |
4 | Bonds | 12% |
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.
Individuals and institutions would still pick individual stocks to try to beat the market, just over a longer time frame. If all money (or a significant portion) was only invested in index funds, liquidity of individual stocks would decrease. That would result in a counterbalancing increase in volatility.
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).
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.
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