Investing in the stock market can be nerve-wracking right now. Although the market has largely recovered from its crash back in March, with the number of COVID-19 cases across the country continuing to climb and some states rolling back their reopenings, there’s a chance another market downturn could be on the way.
Older investors may be particularly nervous about investing at this time, because nobody wants to watch their savings take a nosedive right before retirement. In fact, nearly 44% of boomers say right now is not the best time to be investing at all, according to a survey from Personal Capital.
If you’re nervous about investing in the stock market, it’s important to strike a balance between risk and reward. You’ll want to play it safe enough that you don’t risk losing everything if the market crashes. But at the same time, play it too safe and you’ll miss out on a valuable chance to let your savings grow.
Fortunately, if you want to play it safer while still maximizing your money, there are two smart options: index funds and fractional shares.
Why index funds and fractional shares?
Unlike investing in full shares of individual stocks, index funds and fractional shares allow you to invest in dozens or even hundreds of stocks at a much more affordable price.
An index fund is a grouping of securities that mimics a particular stock market index, such as the S&P 500 or the Dow Jones Industrial Average. So if you were to invest in an S&P 500 index fund, for instance, you’d be investing in all the companies that make up the S&P 500.
Index funds are smart investments for a couple of reasons. For one, they provide instant diversification. By investing in just one index fund, you’re spreading your money across many different stocks at once, thus limiting your risk. Another advantage is that they follow the market, meaning they’re more likely to bounce back from a market downturn. Historically, the stock market has always recovered from each crash it has experienced. By investing in index funds, you may see your investments drop if the market as a whole takes a hit, but you’ll also likely see them recover along with the market.
Fractional shares are a little different in that you invest in individual companies; but rather than investing in a full share of stock, you’re only investing in a partial share. The main advantage here is that it’s easier to invest in high-priced companies. If you’ve been eyeing a particular stock that normally sells for hundreds or even thousands of dollars per share, buying a fractional share can allow you to invest in that company without breaking the bank. That also allows for greater diversification, because you can invest in dozens of fractional shares for the same price as investing in a single full share of a more expensive stock.
When these types of investments aren’t the best option
As many advantages as index funds and fractional shares have, there are also some downsides. Index funds may not be the best fit for someone who wants complete control over their investments, because you’re stuck with all the companies in the fund. If there are stocks in the fund you’d rather not invest in, you can’t do anything about it.
Additionally, because index funds follow the market, that means they’re simply average. If you want to try to beat the market, you won’t be able to do that with an index fund.
Fractional shares have their disadvantages, too. For one, you may not stand to earn as much as if you’d invested in a full share of stock. While you are limiting your risk by investing in just a portion of a share, you’re also limiting your potential rewards. In addition, some brokerages charge flat transaction fees when you buy or sell stocks, regardless of whether you’re buying full shares or fractional shares. If you’re buying dozens of fractional shares, those fees can add up quickly.
Despite their downsides, though, both index funds and fractional shares 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.