To say that 2020 has been a rollercoaster for the stock market would be an understatement. The first quarter of the year was one of the worst on record, with the S&P 500 falling by 34% in just a matter of weeks. Then almost as quickly as the market plummeted, it recovered its losses and experienced all-time highs.
Now with a contentious election around the corner and the number of COVID-19 cases skyrocketing across the country, some investors predict that's a recipe for another crash. While nobody can say for sure what the market will do, there's one type of investment that can make it much more likely your portfolio will survive a market downturn.
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Investing for the long haul
Trying to predict how the market will perform over the next few weeks or months can be nearly impossible, and attempting to time the market could cause you to lose more than you gain. For that reason, it's often better to invest for the long term, focusing on strong investments that can weather market volatility.
While there are never any guarantees in the world of investing, one type of investment that's more likely to survive a market crash is the index ETF, specifically a broad market index ETF.
Index ETFs track stock market indexes, such as the S&P 500, the Nasdaq, or the Dow Jones Industrial Average. There are also more niche index ETFs that focus on specific industries or sectors. Investing in a broad market index ETF that tracks the stock market as a whole -- such as the Vanguard S&P 500 ETF (VOO 0.01%) or the iShares Core S&P Total U.S. Stock Market ETF (ITOT -0.02%) -- is one of the best ways to limit your risk while staying invested in the market.
As close as you can get to guaranteed growth
Again, there are no guarantees when you invest. But broad market index ETFs have a strong track record of bouncing back after market crashes.
The market itself has historically always recovered from each of its downturns. And because many index ETFs track the market, that means they'll rebound along with it.
The S&P 500, which is considered one of the best representations of the stock market as a whole, has experienced some drastic ups and downs over the last two decades. And yet, despite multiple recessions, the dot-com bubble burst, the housing market crisis, and a global pandemic, the index has still achieved an overall positive return over time.
When you invest in broad market index ETFs, your investments could take a fall in the short-term if the market crashes. But because the stock market has an incredibly strong track record of rebounding from crashes, your investments will very likely bounce back as well.
Is now the right time to invest?
When you take a long-term approach to investing, there's not necessarily a bad time to invest. Ideally, you'll be holding onto your investments for several years or even decades, so whatever happens over the next few weeks or months shouldn't affect your strategy.
Just remember that even if your investments take a hit in the short-term, your focus should be on their long-term performance. Market downturns are only temporary, and by staying invested amid volatility, you'll reap the rewards when the market inevitably recovers.
