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. What are the best ways to lower my investing fees?

    Lower your investing fees by buying index funds or ETFs, choosing the right mutual fund share class, evaluating breakpoints ...
  2. Can you buy shares in the Dow Jones Industrial Average (DJIA)?

    Invest in the Dow Jones Industrial Average index through index funds or ETFs.
  3. Is it possible to beat the market?

    "Beating the market" means trying to earn an investment return greater than that of the S&P 500 index, one of the most ...
  4. What is the difference between investing and trading?

    Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing ...
RELATED TERMS
  1. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Mean-Variance Analysis

    The process of weighing risk against expected return. Mean variance ...
  4. Ulcer Index - UI

    An indicator developed by Peter G. Martin and Byron B. McCann ...
  5. Event Risk

    1. The risk due to unforeseen events partaken by or associated ...
  6. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
comments powered by Disqus
Related Articles
  1. Choosing The Right ETF Index To Reach ...
    Investing News

    Choosing The Right ETF Index To Reach ...

  2. Using Normal Distribution Formula To ...
    Investing Basics

    Using Normal Distribution Formula To ...

  3. Human Capital, An Important Asset For ...
    Investing Basics

    Human Capital, An Important Asset For ...

  4. Beware Of Wall Street's Three Big Lies
    Fundamental Analysis

    Beware Of Wall Street's Three Big Lies

  5. To Invest Or To Reduce Debt, That's ...
    Investing

    To Invest Or To Reduce Debt, That's ...

Trading Center