The broad market is sluggish. Should you stay away?
It's no secret that the stock market hasn't had a good couple of months. Economic concerns and tensions overseas have created the perfect storm of sluggishness, and now, a lot of investors are seeing on-screen losses in their portfolios on the heels of a strong 2021.
To be clear, stock market corrections, like the one we're in the midst of, aren't a reason to panic. That's because they're actually quite common. Plus, the one good thing about a stock market downturn is that it can open the door to buying opportunities. And if you're the type who's not so comfortable hand-picking stocks, you may prefer to invest in the broad market by buying ETFs instead.
But is now a good time to be loading up on S&P 500 ETFs? Or does it pay to sit tight and wait for better days?
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Seize the opportunity
ETFs, or exchange-traded funds, allow you to own a bucket of different stocks with a single investment. S&P 500 ETFs, meanwhile, allow you to effectively own a piece of the 500 largest publicly traded companies. That, in turn, gives you a world of diversity in your portfolio. And it also offers you a degree of protection during volatile periods like the one we've been grappling with since January.
Meanwhile, just as now is a good time to snag individual stocks at a discount, it's also a good time to buy more shares of an S&P 500 ETF. While the stock market certainly hasn't hit rock bottom, the reality is that there's still plenty of room for broad market growth. So if you load up on S&P 500 ETFs now, there's a good chance your portfolio will gain value in time.
That said, right now, a number of once-overpriced stocks are trading at lower levels due to the general market correction. If you've been thinking about branching out and buying individual stocks, you may want to jump on that opportunity while you can.
In fact, a good approach to today's correction may be to add S&P 500 ETFs to your portfolio, but also scoop up shares of individual companies you're convinced have solid growth potential. That way, you can set yourself up to benefit from gains when the broad market recovers, but you also might might get a chance to beat the market with the right individual stock picks.
Many people are inclined to believe that investing in stocks when the market is down is a poor choice. But actually, the opposite tends to hold true.
Stock market downturns can be an ideal time to invest because you can get in at lower price points. So as long as you have enough cash on hand to cover a few months of essential expenses, and as long as you won't need to tap your portfolio within the next few years, it pays to keep investing -- even at a time when the market is volatile and stocks may have a long road toward recovery ahead of them.
FAQs
Key Takeaways. Investors can use exchange-traded funds (ETFs) to diversify their portfolios. Sectors that weather an economic downturn include healthcare, information technology, consumer staples, and utilities. An ETF is passively managed and includes a basket of stocks.
Should you buy S&P 500 ETF? ›
The Vanguard S&P 500 ETF (VOO 0.68%) is one of the best ways to invest in the S&P 500, which has been a pretty smart strategy over the long term. Since 1965, the S&P 500 has produced a total return of 10.2% annualized. The Vanguard ETF has an expense ratio of just 0.03%, so you get to keep most of your gains.
What ETF goes up when the stock market goes down? ›
What is an inverse ETF? An inverse ETF is set up so that its price rises (or falls) when the price of its target asset falls (or rises). This means the ETF performs inversely to the asset it's tracking. For example, an inverse ETF may be based on the S&P 500 index and designed to rise as the index falls in value.
Should I only invest when the market is down? ›
As a general rule, it's safer to double down and invest when the market as a whole is down instead of trying to snatch up individual stocks that are bottoming out. Down markets offer a unique blend of risk and reward. But as any savvy investor will tell you, market conditions should not dictate investment strategy.
Are ETFs safe if the stock market crashes? ›
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Why I don't invest in ETFs? ›
Less Diversification
For some sectors or foreign stocks, ETF investors might be limited to large-cap stocks due to a narrow group of equities in the market index. A lack of exposure to mid- and small-cap companies could leave potential growth opportunities out of the reach of certain ETF investors.
What if I invested $1000 in S&P 500 10 years ago? ›
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
Is there a downside to investing in ETFs? ›
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
What is the S&P 500 forecast for 2025? ›
ICYMI - UBS raise its S&P 500 forecast as high as 5600, 4 reasons for support. UBS raised its forecast price target for the S&P 500 to: 5500 at the end of 2024. 5600 by June 2025.
Has an ETF ever gone to zero? ›
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
Instead of buying a handful of individual stocks, investing in an ETF would give you instant exposure to a multitude of stocks. Unlike a managed fund, an ETF does not aim to beat the index, but to match its performance, giving you potentially more predictable returns.
What is the safest investment if the stock market crashes? ›
Add bonds. Adding bonds during a stock market downturn can help cushion the decreasing value of the stocks in your portfolio. Ultra safe bonds like Treasurys carry no risk and can help investors sleep well at night while mitigating the impact of a stock market crash.
What is one thing never to do when the stock market goes down? ›
Don't panic-sell
The most important thing not to do in a market crash is panic-sell.
What does Dave Ramsey say about investing in the stock market? ›
We recommend a buy-and-hold strategy when it comes to investing. The stock market is like a roller coaster. There are going to be ups and there are going to be downs—the only people who get hurt are the ones who try to jump off before the ride is over.
What to buy when the stock market is down? ›
Get more long-term investments
This is a perfect opportunity to invest in long-term stocks is right when the market is hit the rock bottom. The reason for this is simple, long-term stocks that last for over 10-25 years yield more profit because of the indirect impact of deflation and high-profit margins.
When should you buy an ETF? ›
Generally speaking, the best time to trade ETFs is closer to the middle of the trading day rather than the beginning or end.
Should I hold or sell ETFs? ›
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
