Since 2009, the stock market has been in the longest bull market in history. Many people wait on the edge of their seat for the other shoe to fall.
If you find yourself in exactly the same situation and panicking about your investments, you are not alone. But you shouldn’t be worried about a stock market crash for these 3 reasons.
1. Stock market crashes are cyclical
Stock market crashes are inevitable because they are part of a normal stock market cycle. And if you’re invested for the long haul, you might know some of them. But they happen less often than you might think. In fact, in the past 30 years, only three stock market crashes have occurred. The dot-com bubble burst in the early 2000s and during the same decade investors suffered the Great Recession, which lasted from 2007 to 2009. The most recent crash occurred in 2020 due to fears of Covid-19. A stock market crash doesn’t necessarily mean you’ll lose money permanently; despite a 34% loss in March 2020, large cap stocks finished 18% higher at the end of the year than at the start. Even during the Great Recession and the dot-com era, when you ended the year with a loss, you would have got your money back in four years.
If you are afraid of losing money, it may be because you are invested in too risky securities. Instead of trying to avoid a crash, you can make sure that your tolerance for risk matches how you are invested. Taking a simple quiz that examines your feelings about volatility as well as how you’ve reacted to it in the past can be a great way to gauge your comfort level. It can also help you stay invested during a period of falling prices. In a year like 2008, you would have lost 37% of your wealth if you had invested in large cap stocks, but only 16% if you had a portfolio that was half bonds and half stocks. As a result, you would have survived this period better.
2. Stocks get cheap during a stock market crash
You can buy your investments at lower prices during a stock market crash. If you have invested in the S&P 500 at the bottom on March 23, 2020, your accounts would have grown 90% by now. An investment of $ 10,000 in this index would be worth nearly $ 19,000 today. Even if you had bought it a month after the low, your stocks would have returned 50%, and that same $ 10,000 would be worth $ 15,000 today.
Timing the stock market is difficult, however. Although in this particular case the stock market saw a rapid recovery, it is possible that the opposite happened, and your investment in March 2020 would have fallen further before rising again. Using the average dollar cost to buy stocks is a great way to avoid this guessing game. When you use this strategy, you buy a certain amount of investment each month. Some months you get higher prices. And during the months when stocks are losing value, you will get lower prices. But you won’t end up putting a sum of money in the market just before it takes a big loss.
3. Focus on a long term horizon with ups and downs from year to year
If you had invested in the S&P 500 in January 1990, you would have experienced six years of negative returns over the next 30 years. But in the remaining 24 years you would have made gains, and $ 10,000 invested in this index on January 1, 1990 would have recorded an average rate of return of over 10% and brought your accounts to over $ 200,000 by December. . December 31, 2020.
Average rates of return like this can help you predict your account growth and include good years, bad years, and flat years. And missing any of those years could dramatically change your average rate of return. This is why it is important to stay invested throughout the period. Defining your time horizon or the time you have available to accumulate money is an important first step before buying stocks. The more time you have, the more dynamically your accounts can be invested, and if this period is shorter, you should primarily hold conservative investments.
Stock market crashes can be scary because you could lose a large chunk of your wealth in a short period of time. But even if they do happen, they are temporary and don’t happen often. Knowing this information won’t stop you from losing money, but it might help you think about your long-term goals and put short-term losses into perspective.