Are index trackers subject to insolvency risk?
The Financial Services Compensation Scheme says: Investments   FSCS provides protection if an authorised investment firm is unable to pay claims against it. For example: for loss arising from bad investment advice, poor investment management or misrepresentation; when an authorised investment firm goes out of business and cannot return investments or money. Investments covered include: stocks and shares; unit trusts; futures and options; personal pension plans and long-term investments such as mortgage endowments. An index-tracking fund provided by an authorised investment firm would seem to qualify in the cases where: The critical points here then are: I can't find anything easily to hand about FSCS on Blackrock's website, so I would imagine that you'd need to consult the documentation on your investment product to be sure.
I see a couple of reasons why you could consider choosing a mutual fund over an ETF In some cases index mutual funds can be a cheaper alternative to ETFs. In the UK where I am based, Fidelity is offering a management fee of 0.07% on its FTSE All shares tracker. Last time I checked, no ETF was beating that There are quite a few cost you have to foot when dealing ETFs In some cases, when dealing for relatively small amounts (e.g. a monthly investment plan) you can get a better deal, if your broker has negotiated discounts for you with a fund provider. My broker asks £12.5 when dealing in shares (£1.5 for the regular investment plan) whereas he asks £0 when dealing in funds and I get a 100% discount on the initial charge of the fund. As a conclusion, I would suggest you look at the all-in costs over total investment period you are considering for the exact amount you are planning to invest. Despite all the hype, ETFs are not always the cheapest alternative. "1. Interest rates What you should know is that the longer the ""term"" of a bond fund, the more it will be affected by interest rates. So a short-term bond fund will not be subject to large gains or losses due to rate changes, an intermediate-term bond fund will be subject to moderate gains or losses, and a long-term bond fund will be subject to the largest gains or losses. When a book or financial planner says to buy ""bonds"" with no other qualification, they almost always mean investment-grade intermediate-term bond funds (or for individual bonds, the equivalent would be a bond ladder averaging an intermediate term). If you want technical details, look at the ""average duration"" or ""average maturity"" of the bond fund; as a rough guide, if the duration is 10, then a 1% change in interest rates would be a 10% gain or loss on the fund. Another thing you can do is look at long-term (10 years or ideally longer) performance history on some short, intermediate, and long term bond index funds, and you can see how the long term funds bounced around more. Non-investment-grade bonds (aka junk bonds or high yield bonds) are more affected by factors other than interest rates, including some of the same factors (economic booms or recessions) that affect stocks. As a result, they aren't as good for diversifying a portfolio that otherwise consists of stocks. (Having stocks, investment grade bonds, and also a little bit in high-yield bonds can add diversification, though. Just don't replace your bond allocation with high-yield bonds.) A variety of ""complicated"" bonds exist (convertible bonds are an example) and these are tough to analyze. There are also ""floating rate"" bonds (bank loan funds), these have minimal interest rate sensitivity because the rate goes up to offset rate rises. These funds still have credit risks, in the credit crisis some of them lost a lot of money. 2. Diversification The purpose of diversification is risk control. Your non-bond funds will outperform in many years, but in other years (say the -37% S&P 500 drop in 2008) they may not. You will not know in advance which year you'll get. You get risk control in at least a few ways. There's also an academic Modern Portfolio Theory explanation for why you should diversify among risky assets (aka stocks), something like: for a given desired risk/return ratio, it's better to leverage up a diverse portfolio than to use a non-diverse portfolio, because risk that can be eliminated through diversification is not compensated by increased returns. The theory also goes that you should choose your diversification between risk assets and the risk-free asset according to your risk tolerance (i.e. select the highest return with tolerable risk). See http://en.wikipedia.org/wiki/Modern_portfolio_theory for excruciating detail. The translation of the MPT stuff to practical steps is typically, put as much in stock index funds as you can tolerate over your time horizon, and put the rest in (intermediate-term investment-grade) bond index funds. That's probably what your planner is asking you to do. My personal view, which is not the standard view, is that you should take as much risk as you need to take, not as much as you think you can tolerate: http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/ But almost everyone else will say to do the 80/20 if you have decades to retirement and feel you can tolerate the risk, so my view that 60/40 is the max desirable allocation to stocks is not mainstream. Your planner's 80/20 advice is the standard advice. Before doing 100% stocks I'd give you at least a couple cautions: See also:" It certainly is possible for a run on the bank to drive it into insolvency.  And yes, if the bank makes some bad loans, it can magnify the problem. Generally, this does not happen, though.  Remember that banks usually have lots of customers, and people are depositing money and making mortgage payments every day, so there is usually enough on-hand to cover average banking withdrawl activity, regardless of any bad loans they have outstanding. Banks have lots of historical data to know what the average withdrawl demands are for a given day.  They also have risk models to predict the likelihood of their loans going into default.  A bank will generally use this information to strike a healthy balance between profit-making activity (e.g. issuing loans), and satisfying its account holders. In the event of a major withdrawl demand, there are some protections in place to guard against insolvency. There are regulations that specify a Reserve Requirement.  The bank must keep a certain amount of money on hand, so they can't take huge risks by loaning out too much money all at once.  Regulators can tweak this requirement over time to reflect the current economic situation. If a bank does run into trouble, it can take out a short-term loan.  Either from another bank, or from the central bank (e.g. the US Federal Reserve).  Banks don't want to pay interest on loans any more than you do, so if they are regularly borrowing money, they will adjust thier cash reserves accordingly. If all else fails and the bank can't meet its obligations (e.g. the Fed loan fell through), the bank has an insurance policy to make sure the account holders get paid.  In the US, this is what the FDIC is for.  Worst case, the bank goes under, but your money is safe. These protections have worked pretty well for many decades.  However, during the recent financial crisis, all three of these protections were under heavy strain.  So, one of the things banking regulators did was to put the major banks through stress tests to make sure they could handle several bad financial events without collapsing.  These tests showed that some banks didn't have enough money in reserve.  (Not long after, banks started to increase fees and credit card rates to raise this additional capital.) Keep in mind that if banks were unable to use the deposited money (loan it out, invest it, etc), the current financial landscape would change considerably. If you're not insolvent, doing something like this is both a moral and legal hazard: When you are insolvent, the tax and moral hazard issues can be a non-issue. Setting up a scenario that makes you appear to be insolvent is where the fraud comes in. If you decide to go down this road, spend a few thousand dollars on competent legal advice. "Your question points out how most fractional reserve banks are only a couple of defaults away from insolvency. The problem arises because of the terms around the depositors' money.  When a customer deposits money into a bank they are loaning their money to the bank (and the bank takes ownership of the money).  Deposit and savings account are considered ""on-demand"" accounts where the customer is told they can retrieve their money at any time.  This is a strange type of loan, is it not?  No other loan works this way.  There are always terms around loans - how often the borrower will make payments, when will the borrower pay back the loan, what is the total time frame of the loan, etc..  The bank runs into problems because the time frame on the money they borrowed (i.e. deposits) does not match the time frame on the money they are lending." Good addition. When learning finance and business, /u/msattam, realize the world does not work cleanly like it does in a textbook. You have added complexity, both systemic and human caused. And that there is a very good reason that we must understand agency issues and how to mitigate those risks. I tried direct indexing the S&amp;P500 myself and it was a lot of work. Lots of buys and sells to rebalance, tons of time in spreadsheets running calculations/monitoring etc, dealing with stocks being added or removed from the index, adding money (inflows). Etc. All of the work is the main reason I stopped. I came to realize the 0.05% I pay Vanguard is a great deal. Now company A has been doing ok for couple of weeks, but then due to some factors in that company its stock has been tanking heavily and doesn't appear to have a chance to recover. In this kind of scenario, what does happen?  In this scenario, if that company is included in the index being tracked, you will continue holding until such time that the index is no longer including that company.   Index funds are passively managed because they simply hold the securities contained in the index and seek to keep the allocations of the fund in line with the proportions of the index being tracked.  In an actively managed fund the fund manager would try to hedge losses and make stock/security picks.  If the manager thought a particular company had bad news coming maybe they would offload some or all the position.  In an index fund, the fund follows the index on good days and bad and the managers job is to match the asset allocations of the index, not to pick stocks.