This past year has been challenging for a variety of reasons, but one of the bright spots is that lots of Americans are gaining an interest in investing in the stock market. Last spring, many of the major brokerage firms -- including Charles Schwab, TD Ameritrade, Robinhood, and E*Trade -- saw a combined 170% increase in new accounts over the first quarter.
While investing is a fantastic way to build wealth, it does require a strategy. If you're new to the stock market, it can be daunting to figure out where to invest. Especially with some experts predicting another crash is on the way, you'll want to be sure you're investing in stocks that can weather the storm.
Although you can't eliminate risk entirely when investing, these three investments are some of your safest bets.
1. S&P 500 index funds
An index fund is a collection of stocks grouped together into a single investment. In addition, index funds are designed to follow certain stock market indexes, such as the S&P 500, the Nasdaq, or the Dow Jones Industrial Average.
S&P 500 index funds are, like the name suggests, index funds that track the S&P 500. So when you invest in this type of fund, you're investing in all the companies that make up the S&P 500. These organizations are some of the largest, most successful companies in the country, making S&P 500 index funds one of the safest investments out there.
Another benefit of S&P 500 index funds is that they're more likely to bounce back from market downturns. Historically, the S&P 500 has always recovered from every crash it's ever experienced.
Despite the dot-com bubble in the early 2000s, the Great Recession from 2007 to 2009, the pandemic-related crash in early 2020, and the countless other smaller downturns over the years, the S&P 500 has always bounced back. And when the S&P 500 performs well, so do your index funds.
Exchange-traded funds, or ETFs, are also collections of stocks. However, one key difference is that they allow more flexibility than index funds.
When you invest in an index fund, you automatically invest in whatever stocks are included in that particular index. If there are a few companies you'd rather not invest in, you don't have much of a choice with index funds. Additionally, many index funds include stocks from a variety of industries. This can be a good thing to help diversify your portfolio, but it can be a disadvantage if you're wanting to invest in a specific sector.
With ETFs, you can invest in broad-market index ETFs, which are similar to index funds. Or you can invest in niche ETFs that only include stocks from particular industries. While these sector ETFs are riskier than broad-market ETFs or index funds (because they only contain stocks from one industry), they are less risky than investing in individual stocks (because you're investing in many stocks at once).
3. The Dividend Aristocrats
Dividend-paying stocks are investments that actually pay you to own them. When companies have leftover profit at the end of the quarter or year, sometimes they pay a portion of that money back to shareholders. This is called a dividend.
The Dividend Aristocrats are the cream of the crop when it comes to dividend stocks. They are a group of companies that have increased their dividend payment every year for at least 25 consecutive years. Many of the Dividend Aristocrats are household names, such as Coca-Cola (KO -0.27%), Procter & Gamble (PG -0.28%), and Johnson & Johnson (JNJ 0.42%).
The Dividend Aristocrats are not only great for dividends, but they're also solid overall investments. These companies have been around for decades and have proven that they can survive tough economic climates. Even if you're not interested in dividends, these companies are a good starting point for new investors because they're strong long-term investments and less susceptible to market volatility.
Investing in the stock market can be intimidating, especially if you're a beginner. But by getting started with the right investments, you can begin your investing journey on the right foot.