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 do index funds tend to have low expense ratios?

    Understand what an index fund is and why the nature of index funds causes them to have lower expense ratios than more actively ... Read Answer >>
  2. What are the disadvantages of an index fund over an actively managed fund?

    Read the advantages an actively managed fund has over its more staid compatriot, the indexed fund, and make your own decision ... Read Answer >>
  3. Which mutual funds have the lowest fees?

    Discover why index mutual funds are generally less expensive than actively managed funds and learn about three of the lowest-cost ... Read Answer >>
  4. What is an appropriate large cap mutual fund fee?

    Discover what an appropriate fee for a large-cap mutual fund should be, and learn how choosing index mutual funds can lead ... Read Answer >>
  5. How can I find out if a company I like is included in an index?

    There are a few ways to find out what indexes a company is involved in, and investors should take note of them when they ... Read Answer >>
  6. Who's in charge of managing exchange-traded funds?

    An exchange-traded fund (ETF) is a security that tracks an index but has the flexibility of trading like a stock. Just like ... Read Answer >>
Related Articles
  1. ETFs & Mutual Funds

    The 4 Best U.S. Equity Index Mutual Funds

    Find out which four index mutual funds are among the best U.S. equities index mutual funds for core holdings in your investment portfolio.
  2. ETFs & Mutual Funds

    3 Best Global Equity Index Mutual Funds

    Discover three no-load and low-fee global equity index mutual funds that can add worldwide diversification and steady returns to a portfolio.
  3. ETFs & Mutual Funds

    The Lowdown On Index Funds

    If you can't beat the market, why not join it? Read on to go over your options.
  4. ETFs & Mutual Funds

    What are Index Funds?

    An index fund is a type of mutual fund that is tied to a broad stock index like the S&P 500 or the Dow Jones Industrial Average, instead of being handpicked and managed by an investment manager. ...
  5. ETFs & Mutual Funds

    Make Sure You Avoid Adding These Mutual Funds to Your 401(k)

    Find out which five types of mutual funds you should avoid in your 401(k), including why buying this year's hottest fund is likely a losing bet.
  6. ETFs & Mutual Funds

    Index Investing: Index Funds

    Indexes are great tools for telling us what direction the market is taking and what trends are prevailing. So, how do we buy into these investment vehicles? Imagine the costs associated with ...
  7. Trading

    Fund Management Issues

    The quality of management is a key component of a fund's success.
  8. ETFs & Mutual Funds

    4 Traits Of A Great Index Fund

    If you're planning to fill your portfolio with index funds, here's what you should look for in a high-quality fund.
  9. Financial Advisor

    Index or Target Dates in 401(k)s: Which is Better? (VFINX, FUSEX)

    A common question is whether or not plan participants should choose index or target date funds in a 401(k). The answer depends on different scenarios.
  10. Managing Wealth

    Passive Vs. Active Management

    By Richard Loth (Contact | Biography)In almost all economic endeavors, the quality of management is generally a key component of a successful operation. Managing a mutual fund is no exception ...
RELATED TERMS
  1. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  2. Tracker Fund

    An index fund that tracks a broad market index or a segment thereof. ...
  3. Index Investing

    A form of passive investing that aims to generate the same rate ...
  4. S&P MidCap 400 Index

    This Standard & Poor's index serves as a barometer for the ...
  5. Total Return Index

    A type of equity index that tracks both the capital gains of ...
  6. Broad-Based Index

    An index designed to reflect the movement of the entire market. ...
Hot Definitions
  1. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  2. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  3. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  4. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  5. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
  6. Security

    A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship ...
Trading Center