Let’s break down VHT, Vanguard’s Healthcare index fund. Index funds are safer than stocks because of diversification. Choose index funds and make your life easier. Now multiply that by ten to cover ten industries. Imagine hand-picking 423 stocks to invest in one industry… This makes tracking both your portfolio and each industry easy.īack to VHT. If you wanted to invest in ten industries in total, your portfolio would only have ten slices in it. One index fund can cover an entire industry. Can you guess which industry this fund covers? Take Vanguard’s Healthcare index fund (VHT).

You know exactly what you’re investing in. Not only can you sit back and let index funds do the diversification for you, but you’ll also pay a lower fee than other fund types would charge. Index funds are more hands-off for managers, meaning they can charge a lower expense ratio. And indexes don’t buy or sell stocks as often as mutual funds do. With index funds, the fund is tracking an index. More work for them means you’ll pay a higher expense ratio. They may buy and sell stocks occasionally, which means more work for them. With mutual funds, managers pick stocks for you. It’s typically a small percentage that is subtracted from your gains. To clarify, all funds include an expense ratio charged by the people (or company) that put the fund together. One advantage of index funds over mutual funds is that the managers of these funds don’t actively buy and sell stocks.

If you know what happened to cannabis stocks, you know how hard of a lesson that was for him to learn. However, he was confident in this one stock. I suggested that he diversify across industries. Remember this line: “never put all your eggs in one basket”.Ī family member of mine learned this the hard way when he invested 100% of his portfolio into one cannabis stock in 2019. If 5 of those 500 companies in the S&P 500 plummet, you still have 495 companies that can perform well. That’s 500 of the top companies in the United States!ĭiversification allows you to lower your risk in the stock market. An index fund that tracks this market indicator includes 500 companies. Instead of investing in one company, you can have many from the same industry. Index funds are safe for three reasons: Diversification There may be some on the market that you want to avoid.

The short answer is yes: index funds are still safe in the long term. After 2022, however, ideas may have changed. Throughout the previous bull market, this was an obvious yes.

The performance of 2022 left many investors wondering if index funds are still safe investments. The S&P lost 19.4% in 2022! That’s the worst year recorded for this index since 2008.