Is it possible to lose all of your investment in an index fund?

By Chris Gallant AAA
A:

There are few certainties in the financial world, but we can say that there is almost zero chance that any index fund could ever lose all of its value.

There are a few reasons for this. First of all, virtually all index funds operate with a very high level of diversification. Most index funds attempt to mirror some large basket or index of stocks, such as the S&P 500, by simply buying and holding identical weights of each stock as the index itself. Thus, because an index fund's holdings are almost always extremely well diversified, making it is virtually impossible that all of these holdings' market prices would fall to zero, destroying the value of the entire index. (For further reading, see Introduction To Diversification and The Importance Of Diversification.)

Think about it this way: If you randomly pick 100 companies, the odds that a single company of the 100 will go bankrupt might be quite high. However, the odds that each and every one of the 100 companies will go bankrupt and leave shareholders with zero equity is essentially nil. Thus, an investment in a typical index fund has an extremely low chance of resulting in anything close to a 100% loss.

Furthermore, the overall stock market, which most index funds tend to represent with their holdings (or at least a portion or particular sector of the overall market), is almost certain to be producing tangible value over the long-term. Because of this, the total book value of all the underlying stocks in an index is expected to go up over the long term. This ensures that any well-diversified index fund will not significantly decline in value over the long term.

To learn more, check out Index Investing and

Being Lazy With A Couch Potato Portfolio.

RELATED FAQS

  1. Why would an investor opt for a partial redemption as opposed to a full redemption?

    Learn about the difference between a partial redemption and a full redemption, and why an investor might choose to partially, ...
  2. How are blue-chip stocks similar to mutual funds and exchange-traded funds (ETFs)?

    Understand the primary differences between making investments in blue-chip stocks, mutual funds and exchange-traded funds ...
  3. What does standard deviation measure in a portfolio?

    Dig deeper into the investment uses of, and mathematical principles behind, standard deviation as a measurement of portfolio ...
  4. How can I use alpha in conjunction with the Treynor Ratio?

    Learn about alpha and the Treynor ratio and how these metrics are used to assess investment strategy by comparing portfolio ...
RELATED TERMS
  1. Smart Beta

    Investment strategies that emphasize the use of alternative weighting ...
  2. Annual Crediting Cap

    The maximum rate of index growth that an annuity will be credited ...
  3. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  4. Account Minimum

    The minimum balance required to be maintained in an investment ...
  5. Capital Growth

    The increase in value of an asset or investment over time. It ...
  6. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...

You May Also Like

Related Articles
  1. Fundamental Analysis

    Is Apple's Stock Over Valued Or Undervalued?

  2. Mutual Funds & ETFs

    4 Tax-Free Muni Bond ETFs to Consider

  3. Trading Strategies

    A Legendary Market Skill Experience ...

  4. Chart Advisor

    ChartAdvisor for February 13 2015

  5. Chart Advisor

    This Low-Volatility ETF Deserves Your ...

Trading Center