In this new Summer 2021 segment, the Brew’s personal finance writer Ryan Lasker is nose-diving into our inbox to address your personal finance questions. Submit your money woes here.
Stock market index funds are known as the “safe” method of investing, but they can still tank with the market. Are they really a good option for my savings? What about bonds?—Alex from Florida
Stock market index funds can be a great way to grow your savings—in the long-term.
Here’s why investing pros like them: built-in diversification. In a single transaction, you’re investing in hundreds, even thousands, of companies across a variety of sectors. Diversification helps you avoid irreparable, Tower of Terror-esque drops in your portfolio’s value. It’s exactly what the (former?) dogecoin millionaire didn’t do.
But if you’re looking to tap into your savings in the next five years, you may want to look elsewhere than the stock market. Like you said, markets sometimes tank (the S&P 500 has dropped more than 10% several times per decade), which is OK if you don’t need the money right away. Since their inception, the S&P 500, Nasdaq, and the Dow have recovered from every loss and reached new heights. Like after-wedding hangovers, recovery periods vary.
Bond investments tend to carry lower risk than stock investments, making them better suited for short-term investments. Look into FDIC CDs and high-yield savings accounts for ultra low-risk.
PS: Later this summer, Ryan will be writing a twice-weekly personal finance newsletter to make you smarter about your money. Become one of the first subscribers.