Here’s the Worst Time to Invest in an Index Fund

by Jason Unger

Post image for Here’s the Worst Time to Invest in an Index Fund

Over on Quora, I was asked to answer the following question:

Is there ever a bad time to invest in an index fund, such as the Vanguard 500?

Believe it or not … there is a bad time to invest in index funds.

Here’s the truth.

Is there a bad time to invest in an index fund?

Yes.

There is only one bad time to invest in an index fund like the Vanguard 500.

Tomorrow.

Index funds are long-term investments, and the longer you take to invest in them, the lower your returns will be.

I mentioned this briefly when asked about the best investing options in May 2017; these investments are timeless — they’re just as good now as when they were first introduced in 1971.

Of course, if you started investing in them in 1971 … you’d have a lot more money right now 🙂

Index funds are not short-term investments.

The entire point of owning an entire index or industry is that you’re diversifying what you own and riding it for the long-term. Add in the fact that fees are so low, and you’re well on your way to outperforming any other investment options.

Don’t believe me?

Take a look at this.

For 15 Years, Actively Managed Funds Have Failed. Miserably.

The SPIVA scorecard (pdf) for the year ending 2016 looked at the last 15 years of returns, and broke down one-year, five-year, and 15-year comparisons.

  • During the one-year period ending Dec. 31, 2016, 66% of large-cap managers, 89.37% of mid-cap managers, and 85.54% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively
  • During the five-year period ending Dec. 31, 2016, 88.3% of large-cap managers, 89.95% of midcap managers, and 96.57% of small-cap managers underperformed their respective benchmarks.
  • Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.

92%!

Can you believe that? 92 percent!!!

More than 9 out of 10 large-cap actively managed funds trailed the S&P 500 index.

OK, so active funds may not be better than index funds, but you have to think hedge funds are, right?

Thankfully, the great Warren Buffett showed us that’s not true with a million dollar bet against hedge fund manager Ted Seides.

Warren Buffett Bet $1 Million That Index Funds Would Beat Hedge Funds. Guess Who Won?

The problem for Seides is his five funds through the middle of this year have been only able to gain 2.2 percent a year since 2008, compared with more than 7 percent a year for the S&P 500 — a huge difference.

That means Seides’ $1 million hedge fund investments have only earned $220,000 in the same period that Buffett’s low-fee investment gained $854,000.

Just recently, Buffett pointed to the Dow hitting 1 million by 2117 — which isn’t even a risky prediction.

The market has, and will continue, to go up.

So the later you decide to get in, the less you’ll make.

That means tomorrow is the worst time to invest.

Photo by Brad Neathery on Unsplash

{ 0 comments… add one now }

Leave a Comment

Previous post:

Next post: