You'll often hear that it's important to assemble a nice and diverse investment mix. And investing in the S&P 500 index is a great way to do that.
The S&P 500 comprises the 500 largest publicly traded companies by market capitalization. And it's generally considered a measure of how the broad market is doing.
When people say things like "the stock market tanked today," often, they're referring to the performance of the S&P 500 index. So, if you load your portfolio with S&P 500 index funds, that's a solid, hands-off strategy that could make you very wealthy over time.
Image source: Getty Images.
But even if you're broadly invested in stocks, it could still pay to add real estate to your portfolio. You'll benefit from even more diversification, which could help you accumulate more wealth and protect you during periods of volatility.
The upside of branching out into real estate
When the general economy takes a tumble, both stock and real estate values can follow suit. But that doesn't always happen. In fact, it's more than possible for the stock market to experience its fair share of volatility while real estate values hold steady.
That's precisely what's happening today. While stocks are down across the board thanks to late-April/early-May turbulence, property values are still going strong. So, right now, if you were an investor in both the S&P 500 and real estate, you'd likely be seeing losses in one portfolio but steady growth in the other.
Furthermore, if you own an income property that generates steady rental income, that's income you can use to make up for losses in your portfolio when the S&P 500 sinks. It's also money you can use to buy S&P 500 index fund shares when they're heavily discounted, thereby setting the stage for some nice profits down the line.
Of course, some people don't want to take on the risk of owning properties, despite the added portfolio diversification that allows. But in that case, you could add some REITs (real estate investment trusts) to your portfolio instead.
REIT's share values can rise and fall in line with the broad market's performance, but that doesn't always happen. And one benefit to owning REITs is that they tend to pay generous dividends. So, even if your stock portfolio is tanking, your dividend income could help offset those losses.
Remember, companies (including REITs) with strong histories of paying dividends tend to do so even when their share prices are down. That buys you some protection.
Plus, REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. If you hold REITs, you can generally look forward to steady, predictable income no matter how the broad market is performing.
Don't shy away from real estate
Putting money into the S&P 500 is a smart move -- but so is investing in real estate. And there's no reason you can't combine both strategies for a winning portfolio.
