Investing in the stock market at the moment can be nerve-wracking. Although the market has largely recovered from its crash back in March, with the number of COVID-19 cases in the country continuing to climb and some states repaying their recovery, there is a chance that another decline in the market could be underway to be.
Older investors at the moment may be particularly nervous about investing because no one wants to see their savings for retirement take a nosedive. In fact, nearly 44% of boomers say this is not the best time to invest right now, according to a Personal Capital survey.
Image Source: Getty Images.
If you are nervous about investing in the stock market, it is important to find a balance between risk and reward. You want to play it safe enough that you do not risk losing everything if the market crashes. But at the same time, play it safe and you will miss a valuable opportunity to grow your savings.
Fortunately, if you want to play it safer while still maximizing your money, there are two smart options: index funds and fractional stocks.
Why index funds and fractional stocks?
Unlike investing in full stock of individual stocks, index funds and fractional stocks allow you to invest in tens or even hundreds of stocks at a much more affordable price.
An index fund is a group of securities that mark a particular index of stocks, such as the S&P 500 or the Dow Jones Industrial Average. For example, if you were to invest in an S&P 500 index fund, you would be investing in all the companies that make up the S&P 500.
Index funds are smart investments for a few reasons. For one, they provide immediate diversification. By investing in just one index fund, you spread your money over many different stocks at once, thus limiting your risk. Another advantage is that they follow the market, which means they are more likely to return from a market outage. Historically, the stock market has always recovered from every crash it has experienced. By investing in index funds, you may see your investments decline as the market as a whole takes a hit, but you will probably also see them recover along with the market.
Fractional shares are a little different in that you invest in individual companies; but instead of investing in a full share in stock, you only invest in a share. The main advantage here is that it is easier to invest in companies with high price. If you have seen a particular stock that normally sells hundreds or even thousands of dollars per share, buying a fractional stock allows you to invest in that business without breaking the bank. This also allows for greater diversification, because you can invest in dozens of fractional shares for the same price as investing in one full share of a more expensive share.
If these types of investments are not the best option
Just as many advantages as index funds and fractional shares have, there are also some disadvantages. Index funds may not be the best fit for someone who wants complete control over their investments because you sit with all the companies in the fund. If there are stocks in the fund that you would rather not invest in, you can do nothing about it.
In addition, because index funds follow the market, that means they are just average. If you want to try to beat the market, you will not be able to do that with an index fund.
Fractional shares also have their disadvantages. For one, you may not be able to earn as much as if you had invested in a full shareholding. While you limit your risk by investing in only part of a stock, you also limit your potential rewards. In addition, some brokers charge flat transaction costs when you buy or sell shares, regardless of when you buy full shares or fractional shares. If you buy dozens of fractional shares, these fees can add up quickly.
Despite their disadvantages, though, both index funds and fractional stocks are good low-risk options for those who are nervous about the stock market. Both options are affordable ways to diversify your investments, and they can help you maximize your money while limiting your risk.
