The stock market has taken a tumble over the past week, with the Dow Jones Industrial Average plunging around 1,600 points in just the past three trading sessions . That may be unnerving for investors who are worried another market crash is on the horizon.
The truth is that nobody can predict whether or not another market crash is on the way. However, there's a good reason why you shouldn't worry about what the short-term future holds for the stock market.
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Why it doesn't matter what the market does right now
It's easy to get hung up on the market's everyday ups and downs, but for most investors, it doesn't necessarily matter what the stock market does in the short-term. Instead, it's more important to focus on building a solid portfolio that can stand the test of time.
It's nearly impossible to time the market, or sell your investments just before the market takes a turn for the worse. Even the experts can't predict exactly when or if a market crash will occur, so it's incredibly difficult to determine the precise opportunity before a downturn to sell your stocks.
Because timing the market is so risky, it's wise to instead opt for long-term investments that you intend to hold for years, or even decades. When you take a long-term approach to investing, you don't need to worry about what the market does today, next week, or next month. Your portfolio could potentially take a hit if the market does crash -- but if you're not planning to sell anytime soon, you can simply ride out the storm and wait for your investments to recover.
How likely is it the market will recover from a crash?
Although it's often best to stick it out during market downturns and wait for your investments to bounce back, that can be a nerve-wracking process. Especially if you're the type to check your portfolio often to see how much your investments have gained or lost each day, waiting it out can be tough.
In that case, one of the best things you can do to calm your nerves is to look at the big picture. Historically, the stock market has not only recovered from each of its crashes, but it's bounced back stronger than ever. Even when the market took a nosedive this past March, it made a remarkable recovery soon after.
As seen here, the market experiences small ups and downs almost constantly. But overall, there has been a strong upward trend over the years -- even after the major market downturns in 2008 and earlier in 2020. If the market crashes again, it's extremely likely it will recover. And as long as you keep your money in long-term investments, you'll reap the rewards once the stock market inevitably bounces back.
The best long-term investments to ride out a market crash
If you want to give your money the best shot at recovering from a market crash, index funds may be your best bet. Index funds are large collections of stocks, and they're designed to track certain stock market indexes. An S&P 500 index fund, for example, will contain all the stocks within the S&P 500. These funds are among the safest investments out there because they follow the market -- and, again, the market has historically recovered from every crash it's experienced.
If you choose to invest in individual stocks, be sure to do your research to ensure you're investing in solid companies that are more likely to withstand a market downturn. It's also wise to invest in at least 10 to 15 different stocks so you're more protected in case one or two of those stocks don't perform well.
Whether you're new to investing or have been involved with the stock market for years, a market crash can be intimidating. But the good news is that as long as you're investing for the long term and choosing your investments wisely, you can avoid letting a market crash derail your finances.
