The Side of Index Investing Influencers Don’t Talk About

In recent years, I’ve noticed more people adopting index investing

So have I.

Perhaps it’s been popularised by influencers. Or maybe information has simply become more accessible.

It’s so accessible that you can get financial advice from Reddit.

And once you start reading about investing, social media algorithm changes your entire feed into finance content. To a point where every other post becomes a reminder to "buy the index" 

It almost feels like index investing has become a cult.

I am one of the believers

I too invest into the S&P 500 regularly, and have been doing so for years. I’ve also been recommending this style of investing as one of the approaches for my clients.

But as markets continue to make new all time highs every other month, I’m reminded of a story.

A story that many influencers and index investors either forget, or choose not to talk about

Let me bring you back to the year 2000.

In March 2000, the S&P 500 reached an all-time high of 1,420.60.

The ten largest companies in the index were

• Microsoft
• Cisco Systems
• General Electric
• Intel
• AT&T
• Oracle
• Pfizer
• Verizon Communications
• Time Warner
• ExxonMobil

Many, if not most, have since fallen down the rankings.

Leading up to that moment, the S&P 500 had already enjoyed almost 9 years of one of the strongest bull markets in history.

9 years of rally!

Optimism was everywhere.

People genuinely believed the market would continue to rally.

Imagine you had invested $100,000 into the S&P 500 in January 2000.

By the end of March 2000, you’d be feeling pretty good.

Your portfolio had grown to $107,753. More than 7% in just three months.

Then the music stopped.

By the end of June 2000, your portfolio had slipped to $104,099.

“It’s just a pullback,”

By September 2000, you’re still ahead, but barely. $102,909.

Then December 2000 arrives.

Your account is now worth $94,003.

In less than a year, you’ve gone from celebrating a quick gain to sitting on a loss.

Surely it’ll recover soon…

Except it doesn’t.

Three months later, your portfolio falls to $83,613. Nearly 17% below what you originally invested.

The waiting just begun, in the months that followed...

Sep 2001 —  $74,835

Mar 2002 —  $82,058

Sep 2002 —  $58,606

Mar 2003 —  $60,719

Sep 2003 —  $71,618

Mar 2004 —  $81,040

Sep 2004 —  $80,080

Mar 2005 —  $84,523

Sep 2005 —  $88,163

Mar 2006 —  $93,028

Sep 2006 —  $95,715

Dec 2006 — $101,476 (Finally, your portfolio turn green)

A full six years just to break even.

If you had held on just for a little longer, the Global Financial Crisis arrived.

Your portfolio fell once again.

Mar 2008 —  $94,561

Sep 2008 —  $83,111

Mar 2009 —  $56,979

Imagine staying invested for almost ten years,

Your $100,000 had become just $56,979.

This period became known as...

The Lost Decade.

I’m not sharing this to scare you. Nor am I saying you shouldn’t invest in the S&P 500.

In fact, I still do.

But I think every investor needs to know the complete story and be able to accept both the happy and tragic ending

It’s easy to believe markets only go up when that’s all we’ve experienced in the last few years.

But when your portfolio stays red, for 6 years.

You will doubt.

You will question yourself.

You will question the strategy,

You might sell.

History never repeats itself, but it often rhymes.

The companies change. Technology changes. But human emotions rarely do.

Greed. Optimism. Fear. Euphoria.

These will always be around

In the years that followed, academics and practitioners sought out methods to reduce these long periods of pain.

That’s one reason diversified portfolios, such as 60/40 equity and bond portfolio, became popular.

For many years, it worked. Until it didn’t.

Every strategy has a period where it shines, and a period where it disappoints.

Being in Singapore, someone who invested in the Straits Times Index or even bought a property would have experienced a very different journey.

At the very least, they would have collected dividends or rents while they waited.

Whatever strategy you follow, never assume the music will keep playing.

I still believe in index investing.

But investing isn’t just about believing in the upside.

It’s about understanding and accepting the downside too.

Every strategy works, until it doesn’t.