Personal Finance

How much risk am I really taking with index funds?

  • Last Updated:
  • Apr 4th, 2011 11:33 am
Tags:
None
Newbie
User avatar
Dec 24, 2009
74 posts
4 upvotes
Ottawa

How much risk am I really taking with index funds?

I just spoke with my aunt today about her mutual funds. She has actively managed ones though. She says she has not made a profit in 10 years and she recommends against mutual funds altogether. I asked her what kind of mutual funds she bought and she said something about the middle east.

I know index funds are different because they aren't actively managed, but they are still mutual funds. How much risk am I really taking on long term if I buy them? I'm looking at a long time horizon, about 30 years, but what is the risk that I will end up making no profit in 30 years?

I'm looking into buying US, CAD and International equities in the TD e-series.
13 replies
Deal Addict
Nov 15, 2010
2043 posts
793 upvotes
Ottawa
If you diversify and invest consistently over a 30 year period, the chances of you losing money is nearly zero (inflation adjusted).

Your aunt's mistake was investing all her money in a small economy that depends almost solely on one commodity.
Newbie
User avatar
Dec 24, 2009
74 posts
4 upvotes
Ottawa
Yeah, that's what I thought. The first thing I thought was that she shouldn't have put all her money into just middle east mutual funds. She also did not do cost dollar averaging.

Good thing she did diversify into other investments though. She says her blue chip ones have done well.
Deal Addict
User avatar
Sep 26, 2007
3960 posts
146 upvotes
SC
Yea you have to diversify and if you want it to really grow you have to keep investing.

depends if there's a crash near the end of that 30 years.
"We don't have a soul... We are a soul. We have a body." ~C.S Lewis
Deal Addict
Oct 1, 2006
3249 posts
4472 upvotes
Montreal
eiad77 wrote: If you diversify and invest consistently over a 30 year period, the chances of you losing money is nearly zero (inflation adjusted).

Investing in a low cost diversified portfolio is the way to go but the chance of you loosing money is much higher than 0%

In the 20th century 4 out of the top 15 markets suffered a 100% loss (Egypt, China, Argentina, Russia) and two additional countries came very close to a 100% loss (Germany twice and Japan once)
Newbie
User avatar
Dec 24, 2009
74 posts
4 upvotes
Ottawa
Does anyone have any numbers on what the chances are of not making a profit in 30 years? If not, where can I go to find this information?

I'm going to decide on how much of my nest egg to put in risky investments and how much to put in guaranteed investments, but I want to get a better feel for the odds first.
Deal Addict
Nov 15, 2010
2043 posts
793 upvotes
Ottawa
Germack wrote: Investing in a low cost diversified portfolio is the way to go but the chance of you loosing money is much higher than 0%

In the 20th century 15 markets suffered a 100% loss (Egypt, China, Argentina, Russia etc.) and two additional countries came very close to a 100% loss (Germany twice and Japan once)

So 15 markets out of how many countries? At least 100 have stock exchanges. Pick any 30 year period and I would bet that the number of stock markets that double would dwarf the number that lost all their value. Additionally, the market would need to collapse at the very end of your 30 year period to lose all the money that you have invested in that market.

If I have time this week I might run a simulation to see what the chances of losing money are over a 30 year period.
Newbie
User avatar
Dec 24, 2009
74 posts
4 upvotes
Ottawa
Hmmm...if the market suffers a 100% loss, does that basically mean that the country is in complete and total chaos?

I think there is always the risk of apocalyse, civil war, disease etc. but my thinking is that I should be optimistic about the future and if there is an apocalypse, money would be the least of my worries.
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
greenleaves123 wrote: Does anyone have any numbers on what the chances are of not making a profit in 30 years? If not, where can I go to find this information?

I'm going to decide on how much of my nest egg to put in risky investments and how much to put in guaranteed investments, but I want to get a better feel for the odds first.

If you invest only in one market or into a niche fund or specific commodity, there's a slight chance of a loss over 30 years (ie: Japan), especially if not investing continuously and dollar cost averaging. Properly diversified though, it is a near impossibility, at least it has never happened historically (even from 1929-1959).
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Addict
User avatar
Sep 26, 2007
3960 posts
146 upvotes
SC
funny im just thinking about these market crashes...
i find it interesting when they didn't rely on computers that people would be trading without even knowing what the price was...just fear and panic selling.
but now when the help of computers you would think that it would be better but it's not.

anyways chances are if there is a 100% loss then a gic will probably be worthless as the bank that issued it is gone and the insurer backing it is bankrupt.

i'm going to look at this objectively. after a time frame of 30 years...
to have the indexes suffer no loss, the yield has to beat inflation, the currency has to not drop significantly, the mer keeps relatively low.

taking the above into consideration if we're talking a couple different indexes and the owner doesn't manage it
it's really impossible to predict but under the assumptions i would estimate 0-20%, the major factor being the currency followed by beating inflation.
however if compared with a gic the currency risk is removed because both have the same currency risk.

on a side note...silver just shot up... wow
"We don't have a soul... We are a soul. We have a body." ~C.S Lewis
Deal Addict
Jul 8, 2009
2028 posts
482 upvotes
Edmonton
greenleaves123 wrote: Does anyone have any numbers on what the chances are of not making a profit in 30 years? If not, where can I go to find this information?

I'm going to decide on how much of my nest egg to put in risky investments and how much to put in guaranteed investments, but I want to get a better feel for the odds first.

I'd say zero. It's never happened yet.
Deal Addict
User avatar
Oct 26, 2008
2474 posts
170 upvotes
Wing Nut wrote: I'd say zero. It's never happened yet.

If you look at the index as a whole, the closest to not making a profit in 30 years was right after the crash in 1929. It actually took 25 years in 1954 to regain the same level pre-1929.

I'm not a big fan of using historical data and trends to predict the future. Our world is a lot different than it once was as anything can happen these days.
Newbie
Feb 21, 2011
76 posts
12 upvotes
Toronto
greenleaves123 wrote: Does anyone have any numbers on what the chances are of not making a profit in 30 years? If not, where can I go to find this information?

I'm going to decide on how much of my nest egg to put in risky investments and how much to put in guaranteed investments, but I want to get a better feel for the odds first.

There are a lot of statistics data. One I read is 10 years. Within any period of 10 years, there were no of them having return of negative (the book is For Canadian For Dummies). I mean here the MARKET instead of any individual stock/fund. Again, this is statistics data of PAST. What is about future? It could be the same, similar, different or very different. It is all about CONFIDENCE.

Myself, I invest all exclusively in index funds with confident expectation of 8-10% only
Member
Jun 7, 2009
259 posts
9 upvotes
greenleaves123 wrote: I just spoke with my aunt today about her mutual funds. She has actively managed ones though. She says she has not made a profit in 10 years and she recommends against mutual funds altogether. I asked her what kind of mutual funds she bought and she said something about the middle east.

I know index funds are different because they aren't actively managed, but they are still mutual funds. How much risk am I really taking on long term if I buy them? I'm looking at a long time horizon, about 30 years, but what is the risk that I will end up making no profit in 30 years?

I'm looking into buying US, CAD and International equities in the TD e-series.

There are many risks to consider for index funds, inflation risk, currency risk, liquidity risk, etc.
No one here really knows what the next 30 years will bring, the markets may either go up, down to varying degrees or go flat.

The US and Internationl index may end up like Japan's economy, flat.
The CAD index may implode if inflation halts the ecomony of emerging markets (ie. China), as our index is resource/materials heavy.
or
Emerging markets continue with their rise and with it the global markets.

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)