If you’re looking for low-risk investments, index funds aren‘t the place to put your money. Index funds may have lower risk than actively managed funds and most sector funds, but they are hardly risk-free. A 50% fall in the market to which your index fund is attached will cause a corresponding 50% drop in the value of your fund.
If you prefer low-risk investments you will be better off investing in certificates of deposit, bonds, and high yield dividend stocks, such as utility stocks. The income provided by the securities will keep them from falling as dramatically as the general stock market.
Index funds are not the all-weather, widows-and-orphans type of investments we sometimes like to think they are. They are an excellent hold for investors who are looking for growth with an average appetite for risk. But for investors who want something more dynamic, or those are more risk adverse, or in certain types of market environments, index funds may not make much sense.
Readers: Do you agree or disagree? Do you know of any other situations in which using index funds doesn’t make sense?