The stock market has experienced extreme volatility over the
last few months, reaching both record highs and rock-bottom lows in a
relatively short period of time. That kind of turbulence can be unnerving to
investors, especially considering the fact that nobody knows whether another
market crash is around the corner.
While there's no way to avoid risk entirely when you invest
in the stock market, S&P index funds are among the "safest"
investments out there. And there are two important ways they can protect your
retirement savings from a potential market crash.
1. They provide loads of diversification
Diversification is a key component to limiting your risk
when investing. If you put all your savings behind just one or two individual
stocks, you'll be in trouble if those stocks don't perform well. But if you
spread your money across multiple investments, your overall savings won't be as
affected if a few of those stocks take a nosedive.
As their name suggests, S&P 500 index funds track the
S&P 500. That means an investment in one of these index funds instantly
invests in 500 of the largest companies in the U.S. By investing in hundreds of
stocks across various industries, you're significantly limiting your risk
compared to owning just a few individual stocks.
2. They're likely to bounce back after a market downturn
Of course, diversification alone isn't always enough to
prevent your savings from taking a hit. The S&P 500 itself experiences
downturns as well, and if that happens, your S&P 500 index fund will also
be affected. However, these funds have a very good chance of recovering from a
market crash.
Historically, the market has always bounced back from each
of its crashes. Earlier this year, the S&P 500 made a remarkable recovery
after experiencing one of its worst quarters in history. If the market crashes
again, it's extremely likely that it will recover eventually. And because
S&P 500 index funds follow the market, when the market recovers, your investments
will bounce back as well.
Between the Great Recession in 2008-2009, the major downturn
earlier this year, and plenty of smaller crashes in between, the S&P 500
has experienced its fair share of volatility. The most important thing to note,
however, is that every time the market has crashed, it has always been able to
recover. The market may crash again, but based on historical data, it will
likely bounce back stronger than ever.
Investing for the long-term
S&P 500 index funds are long-term investments, meaning
they may experience short-term volatility, but they generally see positive
gains over the long run. In fact, the S&P 500 has experienced a historic
average return of around 10% per year since its inception in the 1920s.
Saving for retirement is playing the long game, so try not
to get too caught up in what the market is doing today, tomorrow, or next week,
but what it might do in the coming years. The stock market will experience ups
and downs, but that shouldn't matter as long as you're investing for the
long-term. By stashing your money in an S&P 500 index fund for as long as
possible, you can earn more and give yourself a better shot at retiring
comfortably.
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