The S&P 500 officially entered correction territory recently, falling more than 10% from its peak in early January.
While corrections can be intimidating, they're normal and happen relatively often. It's unclear what the future looks like for the market, however, and there's a chance that stock prices could continue falling.
To be clear, nobody can say for certain whether the market will crash or not. That said, there is one type of investment that can be a smart option during periods of volatility: The S&P 500 ETF (exchange-traded fund).
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Why invest in an S&P 500 ETF?
An S&P 500 ETF is a collection of stocks that aims to mirror the performance of the S&P 500 index itself. Each fund includes roughly 500 stocks from the largest companies in the U.S., spanning a wide variety of industries.
Because the stocks included in this fund are from some of the strongest and most stable companies, it's more likely they will survive market turbulence. Even if a few of the stocks don't pull through, when you're investing in 500 different companies, those few won't bring down your entire portfolio.
The S&P 500 itself has a long history of earning positive average returns over time. Although it does experience short-term downturns, it has historically recovered from each of them. Over the long run, it has earned an average rate of return of around 10% per year.
This can make the S&P 500 ETF a smart option during periods of volatility. Regardless of what happens with the market, there's a good chance your investment will eventually recover. It might take a hit in the short term, but given enough time, it's very likely that it will rebound.
Should you be investing right now?
Market downturns can be daunting, but they can also be smart investing opportunities. Stock prices are lower during a downturn, and it's a good chance to load up on quality investments for a fraction of the price.
Before you buy, though, double-check that you can afford to invest right now. It's wise to have at least six months' worth of savings set aside in an emergency fund. Then if you face an unexpected expense, you won't need to worry about withdrawing your investments when stock prices are down (and potentially locking in those losses).
Also, while S&P 500 ETFs can be a fantastic option for many investors, they're not right for everyone.
An S&P 500 ETF is the best fit for an investor who prefers a hands-off approach, even if it means earning slightly lower returns. This investment, by definition, cannot beat the market because it's designed to follow the market. There's nothing wrong with that, but if you prefer to take a more active role in an attempt to earn above-average returns, buying individual stocks may be a better option.
Nobody can say for sure how the market will perform over the coming weeks or months, but it never hurts to start preparing now. By putting your money behind solid long-term investments, you can ensure you're as ready as possible no matter what happens.
