Over the previous 12 months, the inventory market has skilled some excessive volatility. Whereas varied market indices made a outstanding restoration after their steep downturn final spring, some traders are apprehensive {that a} market bubble has fashioned and is about to burst.

A whopping 66% of traders stated they imagine the market is already in a bubble, in accordance with a latest survey from E*TRADE, whereas one other 25% stated they count on the market is approaching bubble territory.

If we’re in a inventory market bubble and that bubble pops, we’d probably expertise a big market downturn. There are methods for traders to protect in opposition to this and one possibility may also help you defend your financial savings. That possibility? Purchase S&P 500 index funds.

Picture supply: Getty Pictures.

What are S&P 500 index funds?

The S&P 500 is a generally adopted listed record of NYSE– and Nasdaq-listed shares from 500 of the biggest U.S. firms. It is thought of by many to be among the finest barometers of the inventory market’s total efficiency. The businesses included within the index span varied industries — from expertise to retail to prescribed drugs and extra. The shares within the record are chosen by a committee and should meet a number of standards earlier than being thought of.

A number of of the biggest firms within the index are Amazon, Apple, Microsoft, Alphabet, and Fb. However all of them are leaders of their industries, making them among the strongest firms within the nation.

An S&P 500 index fund is an funding automobile that mirrors the S&P 500 index — that means while you purchase into the fund, you are successfully investing in all 500 firms that make up the index. There isn’t a direct option to put money into inventory market indexes themselves, so investing in an index fund is the closest you will get to proudly owning a bit of the particular S&P 500. There are a number of funds that do that, together with mutual funds and exchange-traded funds (ETFs).

Here is why proudly owning a bit of all these shares is helpful if the market crashes.

Protecting your cash secure throughout market downturns

The S&P 500 has skilled substantial volatility over time, but it surely has at all times recovered from the downturns. When the dot-com bubble burst within the early 2000s, the S&P 500 misplaced almost 50% of its worth from 2000 to 2002. It will definitely recovered.

In the course of the Nice Recession, the S&P 500 misplaced round 48% of its worth between 2007 and 2008. However once more, it was capable of bounce again.

Then when the market crashed in the beginning of the 2020 COVID-19 pandemic, the S&P 500 misplaced greater than one-third of its worth in a matter of weeks in what was one of many quickest declines in inventory market historical past. However, as soon as once more, it recovered.

^SPX knowledge by YCharts

If the market crashes once more (and market crashes of some degree or one other occur with some regularity), there’s an excellent probability it’ll get better.

No investments are resistant to periodic downturns, so the bottom line is to concentrate on investments that present a propensity to rebound. The S&P 500 has confirmed many times that it might probably bounce again from even the worst crashes, making S&P 500 index funds among the many strongest and most secure investments obtainable.

Weathering the storms

It is essential to know that while you put money into S&P 500 index funds, you may nonetheless expertise short-term volatility. That’s the nature of inventory markets. However the very best investments virtually at all times see optimistic returns over the long run.

Investing properly within the inventory market typically means enjoying the lengthy sport. To higher guarantee progress, the very best factor you are able to do is search for investments that may climate the inevitable storms and are available out even stronger.

Even with its volatility, shares within the S&P 500 have risen a mean of about 10% yearly for the reason that index was created in 1957. Shopping for funds that mimic the S&P 500 index and holding them long run ought to assist your investments attain comparable optimistic returns.