Can an Index Fund Investor Lose Everything? (2024)

Can an index fund investor lose everything? Probably not. This would entail all stocks in an index effectively going to a price of zero. Even if the companies that issued the stocks all went bankrupt simultaneously, investors would likely recover some money based on the book value of the firm as it sells off assets in liquidation.

An index fund investor owns mutual funds that are constructed to match or track the components of a financialmarket index, such as the(S&P 500). Index funds provide broad market exposure, low operating expenses, and low portfolio turnover. An S&P 500 index fund investor iseffectively buying stock in all of the S&P 500 companies at a low cost.

Key Takeaways

  • An index fund investor iseffectively buying stock in all of the underlying companies in an index at a low cost.
  • Index funds are ideal holdings for certain investors with individual retirement accounts (IRAs) and 401(k) accounts.
  • The total book value of all of the underlying stocks in an index is expected to increase over the long term.
  • Due to diversification and book value considerations, an index fund investor would almost never experience an absolute loss.
  • Index funds are considered a relatively safe investment when compared to individual stocks.

What Is an Index Fund?

An index fund is a mutual fund or exchange-traded fund (ETF) that invests in the securities represented in an index. The fund's goal is to match the performance of the index. By investing in an index fund, an investor gets broad-based exposure to a market through a highly diversified portfolio of securities.

Index fund investing is known as passive investing due to an index fund's buy and hold investment strategy. This contrasts with an actively managed fund that attempts to outperform a benchmark index.

Understanding Index Funds and Potential Losses

While there are few certainties in the financial world, there's virtually no chance that an index fund will ever lose all of its value.

One reason for this is that most index funds are highly diversified. They buy and hold identical weights of each stock in an index, such as the S&P 500. Their goal in doing so is to mirror the performance of the index's holdings. Due to this diversification,it is almost impossible that every stock's market price could fall to zero at the same time.

Consider a random selection of 100 companies. The odds that a single company out of the 100 will go bankrupt might be quite high. However, the chance that each and every one of the 100 companies will go bankrupt and leave shareholders with no equity is essentially nonexistent. Thus, an investment in a typical index fund has an extremely low risk of resulting in anything close to a 100% loss.

Make no mistake, the possibility of loss of value exists. For instance, in a major sell-off, when an index itself loses value, an index fund holding the underlying securities of the index will also lose value. However, investors who hold on to their fund investments should see the fund value increase as the value of the index itself reverses course and increases.

Because index funds are low-risk investments, investors will not see the large returns that they might get from higher-risk individual stocks.

Banking on Book Value

Another reason that index funds are relatively low-risk is the overall stock market. Most index funds represent at least a portion or sector of the overall market. The overall market is almost certain to produce tangible value over the long term. Therefore, total book value of all the underlying stocks in an index is expected to go up over the long term. This means that a well-diversified index fund should not decline significantly in value, given a long time horizon.

Benefits of Index Funds

Passive Investing

Index funds are a great investment for those who don't want to actively manage their investments or fret over the day-to-day fluctuations in value of individual stocks. Those who prefer a more passive approach to investing lean towards index funds as they offer a passive investing strategy.

Although not as liquid as exchange traded funds, index funds can be bought and sold at the end of each trading day. Many investors choose to buy and hold their index funds for months or years.

Low Cost

In addition to diversification and broad exposure, these funds typically have low expense ratios, which means they are inexpensive to own compared to other types of investments.

What's more, index funds have low turnover cost. Securities in an index fund aren't bought and sold often. They're bought and held. An index fund's goal is to match the tracking behavior of the index it follows.

Variety of Choices

The wide variety of index funds available allows investors to dip their toes into a number of different industries, sectors,and stock classes without doing the legwork of research and due diligence on individual stocks. Of course, by investing in a variety of diversified funds, investors can increase diversification even more.


Diversification may be the benefit that spurs so many investors to choose index funds. Again, this broad exposure is the main reason why an index fund reduces risk and why it could never fall to a value of zero.

The dozens, hundreds, or thousands of underlying stocks mean that even if one company goes bankrupt, the effect on the index fund as a whole would be minor. Even if an entire sector were to fall, the fact that there are so many other pieces to your investment pie means investors are much less likely to see major fluctuations in value when compared to owning fewer individual company stocks.

Index funds can be a good choice for tax-sensitive investors. During downturns in fund performance, the availability of similar funds provides an opportunity for an easy tax-loss harvest strategy when it comes time to rebalance.

Index Funds to Consider

Unless you're a savvy investor with a specific reason to purchase an eccentric index fund, it may be smart to consider some of the more popular index funds. These may have significantly more diversification, as well.

Once you review the size and diversification of funds such as those below, you'll begin to see why it is nearly impossible for them to fall to zero value.

Fidelity ZERO Large Cap Index Fund

The Fidelity ZERO Large Cap Index Fund (FNILX) tracks the Fidelity U.S. Large Cap Index, which is essentially the same as the S&P 500. However, because Fidelity doesn't use the S&P name, it avoids paying licensing fees to State Street Corporation. As a result, it can offer this specific fund to investors with a flat expense ratio. That means all money invested in the fund is kept in the fund, never to be eroded by an expense ratio.

Vanguard Total Stock Market Index Fund Admiral Shares

Although the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) has an expense ratio of 0.04%, it won't significantly affect returns. VTSAX is a highly diversified fund with over 4,000 stocks in its portfolio. The fund is also massively popular and manages over $300 billion in client assets.

Schwab Total Stock Market Index Fund

The Schwab Total Stock Market Index Fund (SWTSX) is similar to VTSAX. It's a mix of large, small, and mid-sized companies and offers as broad an exposure to the market as possible. The fund also offers an exceptionally low expense ratio at 0.03%. This is a great fund for those who don't want to have to monitor their investment constantly or be concerned with fees reducing gains.

Do Index Funds Eliminate 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.

What Is the Risk Level of Index Funds?

No index fund is completely free of risk. However, these funds are considered to be some of the safest investments available due to their diversification. Diversification, by design, delivers lower risk.

Are Index Funds Considered a Moderate Risk Investment?

Index funds are usually considered a low risk investment. That's because index funds are highly diversified (to match the index they follow). Diversification wields enormous power in cutting risk.

The Bottom Line

Investors who buy index funds will not lose all of their investment. That's because they're investments buoyed by hundreds or thousands of underlying securities. As such, they're highly diversified, making it almost impossible for them to reach a value of zero.

For novice investors, long-term investors, and those who don't want to spend too much time managing a portfolio, index funds offer a relatively low-risk way to gain exposure to a wide range of equities.

Can an Index Fund Investor Lose Everything? (2024)


Can an Index Fund Investor Lose Everything? ›

As with all investments, it is possible to lose money in an index fund, but if you invest in an index fund and hold it over the long-term, it is likely that your investment will increase in value over time.

Is it possible to lose money in index funds? ›

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).

Has anyone ever lost money on an index fund? ›

Investors who buy index funds will not lose all of their investment. That's because they're investments buoyed by hundreds or thousands of underlying securities. As such, they're highly diversified, making it almost impossible for them to reach a value of zero.

Can an index fund collapse? ›

And there is always the risk that the company could completely collapse into bankruptcy, obliterating your investment. In an index fund, even if one company in that specific market index collapses, there are other companies in the index to carry your investment forward.

Can an index ETF go to zero? ›

For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.

Are index funds really risky? ›

While they offer advantages like lower risk through diversification and long-term solid returns, index funds are also subject to market swings and lack the flexibility of active management.

What are 2 cons to investing in index funds? ›

The benefits of index investing include low cost, requires little financial knowledge, convenience, and provides diversification. Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).

Why don t the rich invest in index funds? ›

Wealthy investors can afford investments that average investors can't. These investments offer higher returns than indexes do because there is more risk involved. Wealthy investors can absorb the high risk that comes with high returns.

Why don t more people invest in index funds? ›

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.

Can the S&P 500 go to zero? ›

And while theoretically possible, the entire US stock market going to zero would be incredibly unlikely. It would, in fact, take a catastrophic event involving the total dissolution of the US government and economic system for this to occur.

Could Vanguard lose all my money? ›

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.

What is the downside to 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.

Are index funds safer than stocks? ›

Index funds are generally considered safe because they don't rely too much on the performance of any individual stock, and they also don't rely on the competence of investment managers as actively managed mutual funds or hedge funds do.

When should I exit an index fund? ›

If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment.

How long should you stay in an index fund? ›

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.

What happens if an ETF goes bust? ›

If you own ETF shares, you will receive cash equivalent to the value of your holding on the day of liquidation (not the value on the last day of trading).

Are index funds guaranteed money? ›

Market indexes tend to have a good track record, too. Though the S&P 500 certainly fluctuates, it has historically generated nearly a 10% average annual return over time for investors. (Just remember that future returns are not guaranteed.)

Can you live off index fund returns? ›

Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.

How long do you have to keep money in an index fund? ›

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.


Top Articles
Latest Posts
Article information

Author: Msgr. Benton Quitzon

Last Updated:

Views: 5551

Rating: 4.2 / 5 (43 voted)

Reviews: 82% of readers found this page helpful

Author information

Name: Msgr. Benton Quitzon

Birthday: 2001-08-13

Address: 96487 Kris Cliff, Teresiafurt, WI 95201

Phone: +9418513585781

Job: Senior Designer

Hobby: Calligraphy, Rowing, Vacation, Geocaching, Web surfing, Electronics, Electronics

Introduction: My name is Msgr. Benton Quitzon, I am a comfortable, charming, thankful, happy, adventurous, handsome, precious person who loves writing and wants to share my knowledge and understanding with you.