Let’s get this straight: index funds are a great tool for passive, low-cost investing.
For those with a long time horizon, a diversified index portfolio can be an effective way to build wealth.
That said, historical data shows that markets don’t always deliver positive returns over short periods, and trying to time the market can significantly impact outcomes.
A short case study for you: the "Lost Decade" (2000–2009)
One of the best examples of this risk is the period from 2000 to 2009, often called the "Lost Decade" for U.S. stocks.
- From January 1, 2000, to December 31, 2009, the S&P 500 had an annualized return of just 1.0% when including dividends.
- If we exclude dividends, the price return of the S&P 500 was actually negative (-0.95% per year) over that period.
- By contrast, U.S. bonds (as measured by the Bloomberg U.S. Aggregate Bond Index) returned 6.33% annually over the same period.
An investor who needed to withdraw funds during this period - whether for a home purchase, retirement, or other expenses - would have faced significant losses or near-zero returns despite staying invested in a widely respected index.
Short-term volatility in the S&P 500
Even beyond the Lost Decade, short-term investing in the S&P 500 has led to unpredictable outcomes:
- Since 1928, the S&P 500 has had negative annual returns in about 27% of years (source: NYU Stern).
- Over a 5-year holding period, the S&P 500 has delivered negative returns about 14% of the time (source: Dimensional Fund Advisors).
- Over a 10-year holding period, negative returns have occurred in 6% of cases - including 2000–2009.
Why a long-term approach matters
The key lesson? Annualized, average returns aren't the returns you get every year.
Investing in the stock market, even in something as well-regarded as the S&P 500, isn’t always a smooth ride.
While it has historically grown over the long run, there are periods - sometimes lasting a decade or more - where returns can be disappointing or even negative.
Short-term investing in the stock market carries real risk. Markets don’t go up in a straight line, and downturns can last longer than expected.
If you invest with a long-term mindset, ideally 10+ years, you give yourself the best chance to ride out the bad years and benefit from future growth.
But if you might need your money sooner (for a home, retirement, or emergencies), it’s important to have a plan that includes safer investments, like bonds or cash reserves, to avoid being forced to sell when markets are down.