2 reasons why you shouldn’t worry about a stock market crash – and 2 reasons why you should
Jhe stock market has been turbulent lately and this volatility may cause investors concern. Coupled with the economic uncertainty we are facing at the moment (including soaring inflation and the potential interest rate hikes this year), some investors fear a crash is looming.
To be clear, it is impossible to say for sure whether a stock market crash is coming or not, as even experts cannot predict exactly how the market will behave in the short term.
While no one knows for sure what’s in store for the stock market, there are a few reasons why you shouldn’t be worried about a potential crash — as well as two instances where a downturn might be of concern.
Why you shouldn’t worry about an accident
1. The market will eventually rebound
Stock market crashes can be intimidating. No matter how long you’ve been investing, it’s scary to watch your portfolio lose value.
The most important thing to remember during times like these, however, is that the market as a whole has a very long history of recovering from downturns. In fact, since 1928, the S&P 500 has fallen more than 20% on 21 occasions. And each time he finally bounced back.
Of course, sometimes it takes months or years for the market to fully recover from a crash. But historically, it has always managed to bounce back stronger than ever.
2. It is almost impossible to time the market
In theory, the best investment strategy would be to take your money out of the market just before prices fall and then reinvest when they are at their lowest. It’s called market timing, and it’s a strategy that some short-term investors use to make a quick profit.
However, this tactic is almost impossible to pull off. Because the market is unpredictable, no one can say exactly when it will crash or when prices will bottom out. In many cases, the market will dip only to rebound a day or two later.
If you sell and prices recover quickly, you will miss out on these potential gains. Likewise, if you wait too long to sell and prices have already fallen significantly, you risk selling at a loss.
A safer bet, then, is to simply hold your investments regardless of what the market is doing. If prices go down, do your best to wait until they eventually recover.
When a potential accident could be of concern
1. You invest too much money
While market downturns are normal (and an inevitable part of the market journey), there are times when a downturn could potentially hurt your finances.
It is possible to invest too much money in the stock market, especially if you are investing money that you cannot afford to lose.
When the market deteriorates, stock prices can drop significantly. This makes downturns a particularly bad time to sell your investments. If all your money is tied up in stocks and the market crashes, you could find yourself in financial trouble if you incur an unexpected expense.
For this reason, it is wise to check that you have an emergency fund filled with at least six months of savings. Not only will this protect your finances in the short term, but it will also make it easier to keep your money in the market, which will help your investments grow more in the long term.
2. You are investing in the wrong places
The stock market itself has a long history of recovering from downturns, but that doesn’t necessarily mean that all individual stocks will be able to rebound equally. Poor quality stocks may not be strong enough to withstand high volatility, and if you have a lot of these investments in your portfolio, your savings could be at risk.
Before a downturn hits, examine each investment in your portfolio and ask yourself if its fundamentals are strong enough to survive the volatility.
Of course, no one can predict exactly how a stock will perform, but the healthiest investments have strong finances, a capable management team, and a competitive edge in their industry. With such strengths, a company has a better chance of recovering from a market downturn.
Market declines can be discouraging whether you are a new or a seasoned investor. However, by taking steps to prepare and maintain a long-term perspective, your portfolio is more likely to thrive no matter what.
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