Plain Money ideas Plainmoney investing

It’s not a Ponzi scheme

Add this to the list of reasons why “buy and hold index funds” is a relatively good investment strategy: It’s not a Ponzi scheme.

A bit of explanation: In a Ponzi scheme, a shady operator takes in money, claiming to invest it. It pays off handsomely at first, it seems — but the payoff is illusory because it comes from scamming in new investors. Their money pays off the first investors, but now the Ponzi operator has to go find still more investors to keep up the appearance of a good return.

A Ponzi scheme was limited to scamming small-time ill-informed investors, or so we thought until Bernard Madoff was caught in a $50 billion Ponzi scheme that took in wealthy upper-crust clients. And that brings me to the point. If you buy and hold reputable index funds you can expect to make money over the long haul. You will have some bad years, like 2008. But you’ll never lose it all to a scam.