The stock market has historically been volatile, but in the course of 2020, it's already taken several wild rides. In March, stocks plunged into bear market territory for the first time in many years, spooking investors and leaving near-retirees to worry if their plans would need to be put on hold indefinitely. Thankfully, the market recovered nicely over the course of spring and summer, only to experience an extremely rocky September to date.
It's this very volatility that drives some people to shy away from stocks -- namely, those who are afraid of choosing the wrong investments and winding up poorer for it after the fact. But if you're scared to invest, here's one solution that may help you overcome your fears.
It pays to rely on index funds
One of the most daunting aspects of investing is deciding which companies deserve a place in your portfolio. Ideally, you'll want to load up on a diverse mix, but that could mean taking the risk of buying certain companies at the wrong time, or choosing companies that don't offer as much value or growth potential as you expect them to.
The beauty of index funds is that they take a lot of that guesswork out of investing. As the name implies, index funds simply aim to track the performance of the market indexes they're tied to. An S&P 500 index fund, for example, will try to mimic the performance of the S&P 500 itself, which is an index comprised of the 500 largest publicly trading companies.
When you buy index funds, what you're really doing is investing in the broader market; you're not putting all of your eggs into a number of smaller baskets and simply hoping for the best. And, index funds offer built-in diversification, especially if you choose the right index to follow.
What's the catch? Well, there's a minor one. Index funds aren't designed to beat the market; they're simply designed to match its performance. If that's not good enough for you as an investor, then you can't just fall back on index funds. Rather, you'll need to research and hand-pick stocks, or consider putting money into actively managed mutual funds, which charge much higher fees than index funds and don't always outperform them. But if you're nervous about investing, especially given the volatile year the stock market has had, then index funds could be a good bet. This particularly holds true if you're fairly new to investing and haven't yet landed on a specific strategy.
But make no mistake about it: Index funds are appropriate for seasoned investors and retirees alike. Adding them to your portfolio should give you some peace of mind that if the market on a whole does well, you'll do well, and if the market crashes, your personal crash will be in line with what investors everywhere are experiencing.
Index funds won't take stock market volatility out of the equation; wild swings will always be part of the deal. But they may help you feel more secure as you navigate your personal investing journey.