Stock market volatility has a lot of investors uncertain about what to do with their money right now. Even corporate giants have seen enormous swings in their share prices, and there’s no telling when things will calm down again.
That said, investing is still one of the best ways to grow your wealth over the long term. And if you’re worried about betting on the wrong stock, an S&P 500 index fund can be the perfect place for your savings right now.
What’s an S&P 500 index fund?
For those who don’t know, an index fund acts like a bundle of stocks you purchase as a package, and it’s designed to mimic the performance of a market index. S&P 500 index funds, as the name implies, follow the S&P 500 index, which is composed of 500 of the largest publicly-traded companies in the United States.
Typically, S&P 500 index funds have similar returns to the index itself, but they’ll always fall a little short, because they have expense ratios. These are annual fees all shareholders pay to the fund manager.
Usually, there isn’t a lot of turnover within the S&P 500, but if a new company is added and an old one drops out, fund managers will update their S&P 500 index fund accordingly.
Why invest in an S&P 500 index fund?
S&P 500 index funds have several advantages that make them a great investment at all times, even during periods of volatility. First, they diversify your money with a single purchase. You instantly get part-ownership in 500 large companies across several sectors. This ensures that no single company weighs too heavily on your portfolio. And because these are large, established businesses, you are unlikely to experience as much volatility as you would investing in growth stocks.
This doesn’t mean you can’t lose money. Even S&P 500 index funds can take a dip from time to time. But over the long term, they tend to provide strong returns just like the index itself. As long as you don’t need to withdraw your money within the next few years, these short-term losses shouldn’t worry you too much.
S&P 500 index funds are also known for being pretty affordable. Expense ratios can be as low as 0.03%. That means that for every $10,000 you have invested in the fund, you only pay $3 each year. This can help you hold onto more of your gains over time.
How to get started
You can invest in S&P 500 index funds through most major brokers. The first thing to do is think about which S&P 500 index fund you want to invest in. Look at a few and compare their past performance and expense ratios to see which one appeals the most to you. Then, all you have to do is open a brokerage account if you don’t already have one and buy the index fund.
You could choose to make a one-time purchase if you just have a little extra cash to spare. Or you could try dollar-cost averaging. This is where you invest your money on a schedule, like $50 every week or $200 every month. Doing this can help you resist the urge to try to time the market. Sometimes you’ll buy when shares are high and other times when they’re low. In the end, it evens out, and you end up paying an average price for all your shares.
This hands-off approach can also help you avoid emotional selling when the fund is down. Once you’ve set up a payment schedule, you only have to check in on your portfolio here and there.
As you grow in confidence, you can invest larger sums if you’d like. You can also branch out into individual stock picking if that’s something you feel comfortable with. But keeping the bulk of your savings in an S&P 500 index fund will give you a strong foundation on which to build for the future.
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