Is an S&P 500 ETF a Safe Investment During a Market Crash?

Even if you're a seasoned investor, the threat of a market crash can easily make you anxious. After all, no one wants to think about their portfolio losing money, especially if you're relying on that money to fund your retirement or support other goals.

If you own shares of an S&P 500 (SNPINDEX: ^GSPC) ETF, you may be wondering if you should dump it, given the potential for a market crash at almost any time. But doing so is a move you might regret.

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The benefit of S&P 500 ETFs

For hands-off investors, an S&P 500 ETF can be one of the simplest, most effective ways to build wealth over time.

These funds are designed to track the performance of the S&P 500 index, which includes roughly 500 of the largest publicly traded companies in the U.S. Instead of trying to pick individual winners, an S&P 500 ETF gives you exposure to a broad range of businesses, from technology to healthcare to financial services.

That diversification is one of the biggest reasons S&P 500 ETFs remain popular. If one company struggles, the impact can be limited because the fund owns hundreds of other companies. If you don't want to constantly monitor stocks or make frequent trading decisions, an S&P 500 ETF is a good alternative.

S&P 500 ETFs can fall sharply during market downturns

Even though S&P 500 ETFs can simplify investing, that doesn't mean they can't lose value during a market crash. And those declines can be difficult to watch.

However, market downturns are a normal part of long-term investing. Historically, the S&P 500 has recovered from past crashes and gone on to reach new highs. Investors who sold during downturns often locked in losses and missed out on the eventual rebound.

If you're on the cusp of retirement, an S&P 500 ETF may not be the best fit for your portfolio. If the market crashes, that investment could easily lose value.

But if you're years away from retirement, an S&P 500 ETF is a perfectly appropriate investment to have in your portfolio, even if the market implodes. While your portfolio might lose value, if you're not planning to use that money for years or decades, you have time to wait for a recovery.

But to be clear, you need to stay invested for the long haul to benefit from a market recovery.

If you're the type to sell assets in a panic during a downturn, an S&P 500 ETF may not be a suitable choice for you. But if you trust yourself to stay calm, it's an excellent option.

All told, S&P 500 ETFs are not a risk-free or even low-risk investment. But if you're willing to hold one through market ups and downs, there's a good chance you'll come away with a lot of money at the end of the day.

Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.