So far, 2020 has been full of surprises, to put it mildly. The coronavirus pandemic wreaked havoc on the economy and caused the stock market to plummet earlier this year, but in recent weeks, the market has recovered its losses and experienced a remarkable comeback.
However, as businesses start to open their doors again, coronavirus infections are surging nationwide. Americans are concerned that a second wave of the pandemic is looming, which could lead to a second stock market crash.
Although there's nothing anyone can do to stop an inevitable market crash, there are a few investing moves you can make to protect your savings as much as possible.
1. Don't pull your money out of the stock market
Right now may seem like the perfect opportunity to pull all your cash out of the stock market to keep your investments from taking a nosedive if there's another downturn. However, taking your money out of the market could actually be more dangerous than a market crash itself.
To avoid losing money on your investments, you would need to withdraw them at the exact right moment. You would want to leave your money invested for as long as possible to take full advantage of the current market upswing, but then pull your cash out just before the market begins to fall. That kind of timing is incredibly difficult (if not impossible) to master, so it's best to simply leave your money invested, even during market downturns.
The one advantage of investing during a downturn, though, is that you can get more for your money. Stock prices are lower when the market is down, making it a good time to buy low and sell high. The market will recover eventually, so investing during a crash can result in substantial investment gains.
2. Make sure your investments are allocated properly for your age
Although it's smart to continue investing even if the market crashes, it's important to double-check that you're investing in the right places. Depending on your age and tolerance for risk, it may be a good idea to play it safe for now.
If you're nearing retirement age, a stock market crash could devastate your savings. That's why as you get older, it's a good idea to invest less in stocks and more in conservative investments such as bonds. Investing at least a small portion of your retirement fund in stocks is smart no matter your age, because it will help your savings grow faster. But in general, the older you are, the more conservative your portfolio should be -- especially when the stock market is volatile.
3. Only invest money you won't need for the foreseeable future
Even during strong economic times, it's wise to only invest money you won't need anytime soon. But this is especially important during market downturns, because pulling your money out of the market at the wrong time can have serious consequences.
Not only could you potentially be subject to income taxes and a 10% penalty for withdrawing money from your 401(k) or traditional IRA before age 59 1/2, but you could also lose money on your investments. A market downturn is one of the worst times to withdraw your investments because stock prices are lower. If you invest now but then need to pull your money out in a few months, you could end up selling when stock prices are at rock bottom and locking in your losses.
Before you invest, consider whether you can realistically afford it. If you don't have a well-stocked emergency fund with enough savings to cover several months' worth of expenses, it might be better to focus on that right now, so you're not risking withdrawing your investments at the wrong time.
Investing during a market crash can be daunting
Nobody knows for sure whether another market crash is on the way, but it's best to be prepared just in case. While it can be intimidating to invest right now, you can improve your financial future by acting strategically.