So far, 2022 has been pretty unkind to investors. Not only has the stock market been volatile, but many investors are noting drops in the ballpark of 10% in their portfolios.
If recent volatility has thrown you for a loop, you may be thinking of running far from stocks and putting your money elsewhere. But before you make that call, here’s another route worth considering.
Rely on the power of the broad market
Any time you buy shares of an individual stock, you risk seeing serious losses if that company fails to meet earnings-related expectations or if general volatility occurs within that company’s market sector. When stocks are swinging wildly, in general, you may be hesitant to add individual stocks to your portfolio.
But that doesn’t mean you can’t or shouldn’t invest broadly in stocks. In fact, when the market is volatile, broad market ETFs, or exchange-traded funds, can be a really solid bet.
When you purchase ETFs, you get to own a whole bunch of different stocks with a single investment. And S&P 500 ETFs will give you really broad market exposure — enough to perhaps buy you some peace of mind during periods of turbulence.
It’s true that when stocks are shaky, the value of the S&P 500 index can drop. But that’s due to broad market declines — not the result of a single company putting out negative news.
And remember, when the stock market goes through these rough patches, it also tends to recover pretty nicely. If you load up on broad market ETFs, even if their value drops on a temporary basis, your portfolio could recover — and then some — if you sit back and leave it alone.
The downside of broad market ETFs
The great thing about broad market ETFs is that they take a lot of the guesswork out of investing and limit your risk, to some degree, because they don’t require you to be overly exposed to a single company. On the other hand, loading up on S&P 500 ETFs won’t help you outperform the broad market. To do that, you’ll need to hand-pick stocks yourself.
But if you’re OK with not beating the market, then ETFs are a great hands-off investment. And that’s a good thing to have during periods of market turbulence.
It’s all about peace of mind
When stocks are shaky across the board, self-doubt can be your greatest enemy. That’s because it can drive you to make rash decisions, like dumping stocks when their value starts to drop, thereby locking in permanent losses in your portfolio.
If you load up on broad market ETFs and leave your portfolio untouched for many years after, there’s a good chance you’ll end up growing serious wealth over time — without having to deal with the stress of tracking the performance of individual companies and worrying that you’ve made the wrong choices. That’s why it pays to consider buying ETFs during periods when you’re feeling largely unsettled as an investor.
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