Index funds are having a moment. They’re the golden child of personal finance gurus, the darling of retirement portfolios, and practically the default answer to “Where should I start investing?”

And hey, the love isn’t misplaced. Low fees, broad diversification, and steady long-term returns? Yes, please.

But here’s the thing: for all their glowing reputation, index funds aren’t as bulletproof as they’re made out to be. If you peel back the layers, there are real risks that are not discussed nearly enough.

Today, we’re not here to bash index funds; we’re here to get real about four hidden pitfalls that could quietly undermine your returns if you’re not paying attention.

You Can’t Ditch the Duds

Imagine buying a box of assorted fruit. Some apples are fresh. Others? Bruised and mushy. But the rule is: you must eat whatever’s in the box.

That’s how index funds work. You get the winners and the losers.

Because index funds track an index (like the S&P 500), they’re required to hold every stock in that index, even if one company is clearly tanking. If a company’s falling apart but still in the index, you’re stuck with it until someone else decides to kick it out.

You Might Be Too Diversified

We all love a well-balanced portfolio. But is there such a thing as over-diversification? Absolutely.

Index funds can sometimes hold hundreds of companies, which sounds safe—until you realize that some of those companies may be dragging your returns down. If your fund owns businesses in sectors you don’t believe in (or understand), you’re just diluting your growth potential.

When the Market Falls, You Fall

A lot of folks mistakenly think index funds are “safe.” They’re not.

Sure, they’re diversified. But they still move with the market. And when the market crashes, guess what? Your index fund crashes, too.

Just ask anyone who held a broad-market index in 2008 or March 2020. Diversification doesn’t protect you from systemic risk. If everything goes down, so does your fund.

Big Tech Overload

If you own an index fund that tracks something like the S&P 500, chances are your portfolio is heavily tilted toward a few mega-cap tech stocks, Apple, Microsoft, Nvidia, and friends.

Sure, they’ve done great. But what if they stop?

This type of top-heavy exposure means that a handful of companies can disproportionately sway your returns. And if they have a bad year? So will your fund, no matter how many other companies are technically included in it.

Index funds are still a solid foundation for many investors, especially beginners. They offer a stress-free, low-cost way to build wealth over time. But just because they’re simple doesn’t mean they’re flawless.

Before you go all-in on passive investing, ask the hard questions: Am I comfortable holding underperformers? Do I know what industries I’m really exposed to? What happens when the market dips hard?