After a decade-long bull market, the stock market experienced a drastic fall earlier this year due to the coronavirus pandemic. Although it has recovered significantly since then, the country is still in a recession, and the number of COVID-19 cases is skyrocketing across the U.S.
The future is uncertain, and it can be tough to manage your investments during times like these. With so many businesses struggling, it's challenging to determine which stocks will pull through this recession. Fortunately, you have a few options for how to invest right now.
This is what Warren Buffett recommends doing with your investments.
Choosing the right investment strategy
In theory, your investing strategy may not change much even during a recession. If you were already investing in solid companies before the COVID-19 pandemic hit, you should likely continue investing in those companies. By investing in strong businesses, you'll have a much better chance of seeing your investments pull through a recession.
However, investing in individual stocks requires a significant amount of time and research to ensure you're investing in solid businesses, and not everyone has the willingness or time to dedicate toward that strategy.
The good news is that there's an easier option, and it's one Warren Buffett strongly recommends: Invest in index funds. During Berkshire Hathaway's virtual annual meeting back in May, Buffett noted that "for most people, the best thing to do is to own the S&P 500 index fund."
An index fund tracks a certain index, such as the S&P 500 or the Dow Jones Industrial Average, meaning the index fund will mimic how the index performs. So by investing in an S&P 500 index fund, you're investing in the 500 companies included in that index. There are plenty of funds that use this strategy, including the SPDR S&P 500 ETF (NYSEMKT:SPY) and the Vanguard S&P 500 ETF (NYSEMKT:VOO). There are several benefits of investing in this type of fund, especially during a recession.
The advantages of index funds
One major advantage of investing in an index fund is that you can achieve immediate diversification. By investing in an S&P 500 index fund, for instance, you're instantly spreading your cash across hundreds of different companies. So if a few of those businesses don't perform well during the recession, it won't decimate your overall investments.
Index funds are also a wise choice for those who don't have much spare cash to invest. Money is tight right now for millions of households, and individual stocks can be expensive. You should aim to invest in at least 10 to 15 different stocks to diversify your portfolio and limit your risk, and those stock prices add up quickly. Investing in a single index fund, though, can diversify your investments at a fraction of the cost.
Finally, index funds are likely to bounce back after stock market downturns. Indexes like the S&P 500 are good representations of the stock market as a whole, and the market has always recovered from even the worst crashes it's faced. Because index funds mimic those indexes, if this recession triggers another market crash, there's a good chance your investments will recover.
Investing for the future can be tricky, especially during a recession. But by investing in index funds, you can limit your risk and give your investments the best chance possible of getting through these tough economic times.