Index funds have rapidly grown in popularity and are seen as one of the safest ways to invest in the stock market. But do Index funds always go up, and if so, how long will they keep going up?
Index funds always go up. However, there’s no guarantee that they will continue going up since past performance can’t predict future performance. Historically, index funds always recover over time and have consistently grown in value by around 10% a year on average.
In this article, I will discuss what index funds are, and based on their historical performance, what is the likelihood of them continuing their upward trajectory. Additionally, we will also review some advantages and disadvantages of investing in index funds, so that you can better decide if these would make a good choice for your investment goals.
So, for an exciting discussion on the subject, read on!
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Table of Contents
What Is an Index Fund?
An index fund is a collection of securities spread across a variety of sectors, and it is aimed at replicating the performance of a targeted index . They deliver returns close to an index by either holding individual shares of companies in that target index or by using derivatives such as future contracts and swaps.
It comes in a variety of formats. For instance, you can devote your funds entirely to stocks and shares. Alternatively, you can invest in bonds or a mixture of the two.
Stocks and shares index funds are seen as riskier but will generally have higher rates of growth. Bond funds are much safer and more predictable but have far inferior returns.
Additionally, index funds are an excellent way for new investors to get a taste of the financial markets and for experienced investors to invest their money at low risk. Hence, they have become prevalent in recent years.
Warren Buffet stated that index funds could beat most actively managed funds almost every time in the long run. If Warren Buffet believes this, index funds surely wouldn’t be without any merits.
Do Index Funds Keep Going Up?
Historically, index funds have gone up over a long period. This is because the cluster of companies that an index fund puts your money into tends to continue growing, as a whole, over time.
These companies generally grow faster than inflation, which is why you make money from index funds instead of losing around 2% per year by holding it in a bank.
Also, index funds benefit from something called compounding. This is when the money you earn from your index fund is reinvested, thereby generating even more money.
Compounding has a dramatic effect on the amount of money you earn from index funds.
For example, if you invested $100 per month for 50 years at an 8% return, you’d have made just under $800,000. However, if you invested the same amount for 20 years, you’d have just $60,000.
The combination of company growth and compounding contribute to the development of index fund investment strategies. Over long periods, index funds are almost always likely to go up, thanks to the diversification of securities. But, let us discuss this aspect a bit more in the following section.
Will Index Funds Keep Going Up?
This question is a tricky one to answer for a few reasons. Firstly, you can’t use the past performance of index funds to indicate future performance. And secondly, there’s no way to predict the future. This means the best we can do is speculate, using past performance to help us.
Past figures have shown that index funds will keep going up if held for more than 30 years. This is excellent information to use and suggests that index funds will always increase in value in the long term.
The structure of Index Funds can also reinforce this point. When you invest in multiple sectors across multiple companies, you’re essentially investing in the world economy. This has always bounced back from setbacks and grown every year. It helps us to consider that Index Funds will keep going up.
However, this is all prediction and speculation. No matter how safe or diversified the investment is, your capital is always at risk when you invest. And, you and only you are responsible for the investment choices you make.
This is why proper research and only investing what you can afford to lose is so essential.
When Do Index Funds Go Down?
Index funds may go down, in the short term, because of economic crashes. But they should bounce back in the long run and grow with time, keeping up with inflation.
For example, the 2008 market crash or significant economic decline that accompanied the 2020 coronavirus pandemic saw a substantial decrease in the price of index fund shares.
However, this is generally only a short-term phenomenon. Anyone who had held their money for more than 30 years in index funds always made a profit.
Many people choose to panic and sell when they see the price of their index fund go down. However, economic crashes should be seen as a time to buy, not sell.
If you know that, over time, index funds will go up in value, then you’ll have more confidence to buy when everyone else is selling. It’s also an excellent opportunity to increase your profits, thanks to the reduced price.
Long-term investing should always be your goal with index funds. As such, you should try not to worry about short-term events, like economic crashes. The economy is great at recovering, so have confidence and buy and hold your securities.
Pros and Cons of Index Funds
Here’s a list of the pros and cons of index funds to help you decide whether they are the right investment choice for you:
Pros of Index Fund Investing
Listed below are the primary advantages of investing in index funds:
- Index funds are easy to manage. You don’t have to be an expert in investing to invest in index funds. Index Funds take all of the hassles of research, technical analysis, and constant obsessing over the price of shares that many dread when they consider investing. Instead, all you’ll have to worry about is how much to invest and when.
- They have low costs. You could go to a stockbroker who will cherry-pick some of the best stocks they ‘predict’ will increase value. However, you’ll be paying ridiculous fees, and you may not even make any money from it! The cost of index funds, however, rarely goes above 1% of your investments. So, they’re a great money saver!
- Index funds have great historical returns. Of course, history is no indicator of future performance. However, past data has shown that, on average, an index fund investor has a rate of return of around 8% per year. This is an excellent figure for almost no work on your part.
- Index funds promote diversification. Index funds will pick a variety of stocks across various sectors, meaning your money is hugely diversified; therefore, they’re more immune to crashes in specific industries or individual companies. This is the reason for their high average rate of return.
Cons of Index Fund Investing
Listed below are the primary disadvantages of investing in index funds:
- Index fund investors lack choices when investing in index funds. An index fund heavily limits your input. This can be detrimental for several reasons. Firstly, it stops you from learning more about the stock market; this can stop you from learning from mistakes and ultimately from making more money. Secondly, index funds won’t allow you to capitalize on opportunities.
- You’re in it for the long haul. If you invest in index funds, you can’t count on using that money in an emergency. This is because the fund relies on long periods of investing in weathering the storms of economic crashes. So, you can never put in any money that you might need for an emergency into index funds.
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Conclusion
So, we can provide the best answer as to whether index funds will keep going up. Past performance and the structure of index funds suggest that it’s a safe investment and one which will increase your capital in the long run.
However, since it’s hard to predict the future, your capital is always at risk. So, make sure you decide carefully before investing.
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