Does passive investing have a place in the most active market in recent history? Are index funds safe?
Index funds are the epitome of passive investing. Rather than trying to beat the market by selecting individual stocks, these funds own all stocks constituting the index, matching the performance of the underlying benchmark. There are plenty of advantages to this way of investing – lower fees, less reliance on the competence of a fund manager (many of whom fail to beat the market) and market-wide diversification make index funds one of the safest ways to invest your money.
Then a global pandemic began.
"Just because index funds have been volatile does not mean investors should necessarily steer clear," says Matthew Lui, vice president at Investment Research Canterbury Consulting. "[Investors] should assess their risk tolerance in light of the drawdown and understand that even though investing in index funds has been smooth sailing for quite some time, every once in a while you'll get whacked with an event like what happened in the first quarter."