Index funds are often touted as a great way to passively build wealth. In fact, Warren Buffett, one of the greatest investors of all time, recommends the average investor invests in index funds. But index funds are a long-term investment, which begs the question: how long should you keep money in an index fund?
In general, index funds should be held for at least 10 years. When held for 10 years, the investment has time to recover from market downturns, and continue to grow. If index funds are held for a shorter time period, the investment is more susceptible to market volatility.
Over the long run, index funds have returned 10% annually, but this is by no means smooth growth. Investing for the long-term means you can weather the volatility that comes with the market, and your investment has time to recover from any downturns.
Average Index Fund Returns by Time Frame
Index funds track the performance of the market, which can vary dramatically. In the last 50 years, the annual returns for the S&P have been as low as -37% (2008), or as high as 38% (1995). On average, the returns have been ~10% annually (across both price growth and dividends), but as shown, the annual returns are not smooth:
This means that depending when you invest, your investment could love value in the short term. For example, if you invested at the peak of the market in 1999, your returns would be negative until 2006.
As such, index fund investing should be a long-term strategy. That way you can ride out these market dips, resulting in that long-term average return of 10%. Let’s look at the returns for various years of investment (in the S&P 500 since 1957):
| Years Invested | Worst Return (%) | Average Return (%) |
| 3 | -27.0 | 10.6 |
| 5 | -12.5 | 10.3 |
| 7 | -3.5 | 10.5 |
| 10 | -1.4 | 10.6 |
| 15 | 0.6 | 10.6 |
Now you can see that the average return for all time-frames are close to the long-term average of 10%, but the worst return for each is telling. When you’re investing for 3-5 years, there’s been points in history where you have double digit compounding losses. The means that if you start investing at the wrong time, you can lose a significant amount of money in the short term.
Contrast that with the long-term investments of 7-15 years. The worst returns may be negative, but they’re much less so than the shorter time frames. In the last 70 years, a 10 year investment has only had negative returns once (during the great recession – 2008).
Here’s the graphical representation of these returns:
As you can see, the shorter time frames (3-5 years, in blue or orange) have much sharper variations, and dip negative much more drastically.
The longer time frames (10-15 years) have a much more flattened trend. This is because when you invest for longer time frames, your investment has time to recover from market dips. When investing on a 10 year time frame, there has only been two points in history with negative returns (the great depression in the 1930s, and the great recession in 2008). If you invest for 15 years or more, historically you would have not lost money.
Index funds are susceptible to market fluctuations, but by holding for 10 years or more, you are able to recover from market downturns. As the saying goes, “it’s time in the market, not timing the market.”
Are Index Funds Safe?
Seeing this fluctuation in S&P returns begs the question, are index funds safe?
Index funds are safer that individual stocks as the investment is diversified, but it is still exposed to overall market movements. If you purchase an index fund, you own a portion of every stock on that index, meaning the performance of an individual company will not have a major effect on your investment.
But as mentioned, index funds will track the overall performance of the market. If the market drops by 20%, so will the index fund. Index funds do not provide downside protection. As such, it’s often wise to pair index funds with other investments like bonds, which will protect your investment during market downturns.
That said, when you’re purchasing an index fund like the S&P 500, you’re betting on the whole market. So though your investment may go down, it would take a catastrophic event to bring the whole market down completely.
Historically, the S&P 500 has returned ~10% annually, but this is not ever guaranteed. That said, of stock market investments, index funds are on the safer side.
How Long Will it Take Index Funds to Double?
Using the rule of 72 and an average return of ~10%, the S&P 500 will take around 7 years to double.
The rule of 72 is a helpful rule of thumb for estimating how long an investment will take to double. By dividing 72 by the return/interest rate, you can get an approximate length of time.
So for other index funds (e.g. ones that track the Nasdaq, Dow, TSX, etc.), you can take 72 and divide the historical return to get an estimate. Again, this is never guaranteed, but is a reasonable representation of historical behaviour.
How Much Would $1000 be Worth if Invested 10 Years ago?
If you had invested $1000 in the S&P 500 in 2013, it would be worth close to $3000 today. Since 2013, the S&P 500 average rate of return is ~11%. Your investment would have compounded to almost triple the investment.
The growth of your money would look something like this:
Over the long run, the S&P has averaged ~10% annually. Using this average return, $1,000 would grow to $2,593.74. Now this is by no means guaranteed.
As shown above, over a ten year period, the worst historical return was -1.4% (1998-2008). This means that after 10 years, your $1,000 would be worth $868.
On the other hand, the best 10 year average return was 20.1% (1948-1958). This would means after ten years, your $1,000 would be worth $6243.53.
All this to say that there is no guarantees in the stock market. Historically though, the S&P 500 has provided strong returns.