A. Index funds have two main advantages:
- Lower costs
- Instant diversification
However, index funds are not equal to safety. In fact, index investing has two major risks, especially in a bear market -
1. 100% of Bear Market Return
By definition, index funds guarantee that you will suffer 100% of the next bear market's decline! Active Funds might work better because fund managers could keep more cash on hand than do index funds.
2. Over Weight on Over-valued Stocks
Most indexes weight components by market capitalization (stock price multiplied by shares outstanding), therefore, at the peak of bull market, the index has more overvalued stocks, however, in a bear market, those overvalued stocks tend to fall harder.