Investing your money is a great way to grow it into a much larger sum over time. You’ll often hear about people who manage to retire as millionaires on a pretty average income. It’s not as though these people are saving $1 million out of their paychecks. Often, they’re able to get to a $1 million IRA or 401(k) because they invest their savings consistently over many years.
If you’re eager to grow a lot of wealth — for retirement or otherwise — then you may be interested in investing your money. But there’s one factor that tends to hold a lot of people back: fear of losses.
It’s impossible to invest in the stock market without taking on some risk. Stock values can fluctuate from one day to the next, and often without warning.
If you put $10,000 into a stock portfolio, it could be worth $11,000 a few weeks later. Or, it could be worth just $9,000. And there’s often no way to know.
But there are a couple of ways to minimize your investment risks. First, you can stay invested for decades, which gives you time to ride out downturns. The stock market’s average annual return over the past 50 years is 10%, which accounts for years when the market was strong and years when it was battered by declines. This shows us that sticking with stocks for the long haul is a smart move.
The other way you can minimize your investment risk is to build a diversified portfolio of quality businesses. And if you’re interested in an easy way to do that, there’s one investment it pays to consider.
Go broad for great results
Choosing a portfolio of individual stocks requires a fair amount of work. And going this route might make you nervous, because if you add a bum investment to your portfolio, it could lead to losses. That’s why you may want to simply invest your money in the broad market by filling your portfolio with shares of an S&P 500 ETF, or exchange-traded fund.
With an S&P 500 ETF, you’re investing in the 500 largest publicly traded companies across the stock market. The nice thing about this option is that you’re not required to research companies individually, and you’re getting an instantly diversified portfolio to boot.
You should also know that the 10% average yearly return mentioned above for the stock market is based on the performance of the S&P 500. The S&P 500 is commonly used as a benchmark for the stock market on a whole. So putting your money into that index not only makes a lot of sense, but it might give you more peace of mind than choosing stocks individually.
There’s still risk, but a reasonable amount
Let’s be absolutely clear. An S&P 500 ETF is not a risk-free investment. As the broad market rises and falls, so too will the value of your portfolio if you choose this particular option.
But an S&P 500 ETF lets you minimize your risk to some degree due to giving you exposure to 500 different businesses across a wide range of market sectors. And falling back on this option might sit better with you from a risk perspective.
It’s important to feel comfortable with the amount of risk you’re taking on as an investor. Not only do you generally deserve peace of mind, but if you’re too worried about your portfolio, it could lead to rash decisions that cause you to lose money (like selling stocks when their share price falls, rather than waiting for a recovery).
An S&P 500 ETF might fit the bill perfectly in terms of your risk profile, allowing you to benefit from stock market gains over the long term without losing sleep along the way.
