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.