Investing in the stock market can be daunting, especially during economic downturns. The stock market can experience extreme volatility at times, which can be concerning when your life savings are on the line.
However, investing is also one of the best ways to build wealth. You'll likely need to save several hundred thousand dollars (or more) for retirement, and unless you're able to sock away thousands of dollars per month, stashing your money in a savings account simply won't cut it. In order to accumulate serious cash, you'll need to invest in the stock market.
To protect your savings, though, it's important to ensure you're investing the right way. By making this one investing move, you can build wealth while avoiding as much risk as possible.
The secret to protecting your retirement investments
Investing in the stock market always involves some degree of risk, but you can limit your risk by investing wisely. And the key to keeping your investments as safe as possible is to diversify your portfolio.
If you put all your cash in just a few individual stocks and those stocks don't perform well, you could potentially lose a lot of money. But if you spread your money across hundreds of different stocks, your portfolio won't take a nosedive if a few of those stocks plummet in value.
Investing in hundreds of different stocks may sound like a lot of work, but it's easier than you may think when you invest in index exchange-traded funds (ETFs), which are essentially large collections of stocks or other investments. So when you invest in a single ETF, you're actually investing in dozens or even hundreds of different stocks at once. Index ETFs, then, are ETFs that mimic a particular index, such as the S&P 500 or the Dow Jones Industrial Average.
Large indexes like the S&P 500 are among the best representations of the stock market as a whole, so by investing in ETFs that track these indexes, your investments will essentially follow the market. During strong economic times, your investments will be booming as well. This also means that your investments will likely take a hit during recessions, but because the stock market has historically always bounced back after a recession, you can rest easier knowing your investments will also recover if they're given enough time.
Keeping your money safe during recessions
Investing in index ETFs is a great way to diversify your portfolio and ensure you're not putting all your financial eggs in one basket. However, it's equally important to make sure you're managing your investments wisely.
Index ETFs don't require much hands-on management. In fact, these types of funds are considered passive investments because they simply track indexes, as opposed to actively managed mutual funds, where a portfolio manager selects which investments are in the fund. In other words, you don't need to worry about choosing individual stocks when you invest in an index ETF.
You do need to consider your overall risk tolerance when you invest, though. Even when investing in ETFs, you can play it safe by investing in bonds or take on more risk by investing in stocks. It's a good idea to invest more heavily in stocks when you still have years until retirement, because your investments will grow faster. You're taking on greater risk by investing mostly in stocks, but your investments also have more time to recover after a market downturn if you have a long time horizon before you need access to your money. Then, as you get closer to retirement age, you'll likely want to invest more heavily in bonds and other conservative investments, so your portfolio won't be hit too hard if the economy slips into a recession shortly before you retire.
Your risk tolerance will change as you get older, so make sure your investment portfolio is adjusting as well. You'll want to make these adjustments before a recession strikes, because if you wait until the stock market crashes to realize you're investing too heavily in stocks, it's too late to do anything.
If you want to give yourself the best chance at retiring comfortably, you'll likely need to invest in the stock market. By investing wisely and diversifying your portfolio as much as possible, you can protect your savings and set yourself up for a more enjoyable retirement.