How safe are index funds?
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.
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).
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.
The S&P 500 carries market risk, as its value fluctuates with overall market performance, as well as the performance of heavily weighted stocks and sectors. For example, the technology sector performed poorly in 2022 and was a large contributor to the index's correction that year.
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).
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.
There are many ways to start investing, but one that's worked for billionaires like Warren Buffett is investing in low-cost index 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 legend Warren Buffett has said that the average investor need only invest in a broad stock market index to be properly diversified. However, you can easily customize your fund mix if you want additional exposure to specific markets in your portfolio.
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.
Where is the safest place to put your money in a recession?
The Bottom Line
If you're wondering where to put your money in a recession, consider a high-yield savings account, money market account, CD or bonds. They can provide safe places to store some of your savings. It's worth noting that a recession doesn't mean you should pull all your money out of the stock market.
Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
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.
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.
Another reason some investors don't invest in index funds is that they may have a preference for investing in a particular industry or sector. Index funds are designed to provide exposure to broad market indices, which may not align with an investor's specific interests or values.
As a result, the broad-market index has an excellent historical track record of generating wealth. Over its history, the S&P 500 has generated an average annual return of 9%, including re-invested dividends. At that rate, even a middle-class income is enough to become a millionaire over time.
Index funds are also tax-efficient, which is great news for retirees. This is because index funds generally have lower turnover than actively managed mutual funds. And what does turnover mean, exactly? It's the number of times a fund manager buys and sells stocks within the portfolio over a given period of time.
In the unlikely event that we become insolvent, your money and investments would be returned to you as quickly as possible, or transferred to another provider. This is because your money and investments are held separately from our own.
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.
Can index funds beat inflation?
Investing in assets with returns that outpace the rate of inflation is one of the best ways consumers can beat inflation. Experts typically recommend investing in diversified index funds based on broad market indexes like the S&P 500, as opposed to holding on to cash.
Buffett not only sees index funds as the simplest path to achieve a diversified portfolio, but they're also the cheapest.
Buffett's ultimately successful contention was that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pit two basic investing philosophies against each other: passive and active investing.
Warren Buffett has attained legendary status in the investment world, thanks to the incredible returns he has racked up over the past nearly-60 years at Berkshire Hathaway (BRK.B) . Buffett has generated average annual returns of 22%, doubling the S&P 500, since he got started in 1965, according to Yahoo Finance.
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.
