Jaiya Gill

What's an Index?

If you had invested $10K in the S&P 500 five years ago, you would have ~$19K today. The S&P 500 index out-performed most hedge funds over the last decade. And it wasn’t even close. Let’s dive into what indexes are, and why people love them.

What are index funds?

Simply put, an index fund is an easy way to invest in multiple companies and stocks at once instead of investing in a single company or stock, allowing you to diversify your portfolio. By buying an index fund, you’re buying a small slice of the entire market. It also gives a quick overview of how the stock market is performing since it includes the best stocks in every industry.

The most popular index is the S&P 500 which consists of 500 of the biggest companies in the USA. The index has returned a historic annualized average return of around 10.5% every year since it started in 1957.

Its timeline shows how it's been better than timing the markets:

The History of the S&P 500:

During the first decade after its introduction in 1957, and reflecting the economic expansion in the U.S after World War II, the value of the index rose to slightly over 800.
From 1969 to 1981, the index gradually declined to fall under 360 as a sign of high inflation.
During the 2008 financial crisis and the Great Recession, the S&P 500 fell 46.13% from October 2007 to March 2009.
By March 2013, the S&P bounced back from the crisis and continued on its 10-year bull run from 2009 to 2019 to climb more than 250%.
The COVID-19 pandemic in 2020 and the subsequent recession caused the S&P 500 to plummet nearly 20%.
The S&P 500 recovered during the second half of 2020 reaching a number of all-time highs in 2021

From an investing point of view, index funds have always been focused on the long-term game rather than short-term returns. Passively investing by buying and holding not only helps maximize returns over time but is also cheaper, less complex, and helps save on taxes over time. They take away the stress that comes from having to cherry-pick which stocks you think will perform best. Individual stocks may rise and fall, but indexes tend to rise over time.

Hedge funds have tried to beat this over and over by trying to pick stocks and time the market which could work at times but in the long run, they fall short of the steady S&P 500

Here's a chart from Axios (@axios) comparing the annual returns between hedge funds and the S&P 500:

Index fund investing has lowered the barriers of entry for anyone to benefit from the stock market:
They making it easier for anybody to invest in a broad market index that grows steadily on average and compounds each year.
They can help balance risk, as their potential gains and losses are less volatile than those of managed funds that try to beat the market
Anyone can invest and benefit without a ton of capital. It’s also easy to get started in since it doesn’t require a financial background or special degree to understand.

Warren Buffett is one of the most successful investors in the world with a net worth of over $117 billion – and even he recommends getting started with index funds to passively generate wealth over time. In 2008 he bet an active manager that he would make more money investing with an S&P 500 index fund than the active manager would by picking his own funds. After 10 years, Buffet came out as the winner, averaging 7.1% while the active manager only earned 2.2% for his selection.

Like all things in life, indexes have their limitations too:

You won’t beat the market since it’s meant to match the market. Index funds don’t set out to outperform the market, instead, they try to be the market.
If the market takes a hit your fund also takes a hit. Index funds track the market in good times and bad, so you can’t tactically adjust holdings to defend against extreme market corrections.
You don't get to pick and choose which companies or stocks you want to be included or not in the index fund you invest in. If you invest in an index fund, you’re investing in all of them.

In the long run, the market usually wins. And, as history has taught us, even if there’s a downswing in the market, the market always bounces back.

In conclusion, if you're interested in building your wealth but aren't too fond of doing a lot of research, then index funds can be a great way to help you reach your financial goals. And if you're considering investing in crypto, we're building the indexes for it.