Are you worried about a market crash? You shouldn't be, despite all signs pointing to the fact that one is coming. That's because a market crash can't hurt your portfolio over the long term except in three scenarios, all of which you can easily avoid.
Here's what they are.
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1. You react and panic sell when the market goes down
When a stock market crash happens, you may see the share prices of your stocks fall -- sometimes by far more than you're comfortable with. But while it may feel like you've lost money, those losses are only on paper and can be reversed right up until the point you've sold a stock at a loss. Unfortunately, if you sell when your share prices start to fall because you're afraid, you could end up turning what could be a temporary loss into a permanent one.
While this is an especially big problem if you end up losing money on an investment, you could also end up costing yourself if you decide to cash in profitable investments and lose out on potential gains. If you believe in the companies you invested in, there's no reason to unload your shares just because the price falls during a market correction -- unless something has fundamentally changed with the business and you no longer believe in its future potential.
2. You're a short-term investor and you've got shares of companies that won't stand up to trouble
For those who invest long term, market cycles don't matter because you can simply wait out any downturns and benefit from the inevitable recovery.
But if you've made speculative trades and bought shares of businesses with hopes of profiting for the short term, without considering the company's long-term viability and growth potential, you could get stuck either selling at a loss or holding your shares for far longer than you'd planned if the market crashes.
If the company didn't have what it takes to qualify as a good long-term investment before the crash, there's a chance it may never fully recover from the economic turbulence surrounding it. In this case, your losses very well could become permanent as the share price may never climb back up to what you paid for it.
3. You pull back on investing out of fear
It's not just selling your current investments that could hurt you during a crash -- not continuing to invest money can also damage your shot at building long-term wealth.
See, the obvious goal of investing is buying low and selling high. And a market crash presents ideal opportunities to buy shares of high quality companies at bargain prices. In fact, that's why Warren Buffett has advised being fearful when others are greedy. Instead of reducing the amount you put into the market during downturns, aim to increase it if you can.
Just make sure it's not money you'll need within the next two to five years, as it can be hard to time when the market will hit rock bottom. It doesn't much matter if you invest, see your share prices fall a bit during a continued downturn, and then experience rising share prices during the inevitable recovery -- as long as you didn't need the money right away.
Something's missing from the list?
Upon reading this list, you may be wondering why it's missing the biggest possible threat to your portfolio: The market crashing and never recovering. After all, if stock prices fall and never climb back up, you'd have permanent losses and your efforts to build wealth will have been badly derailed.
But there's a good reason why this scenario wasn't included: It's never happened. In fact, since 1929, there have been 54 occasions when the S&P 500 fell more than 10%. In every case, the market eventually erased all of the losses -- often more quickly than many investors believed possible.
The bottom line is that if you've got a solid investment strategy, a diversified portfolio, and patience, your portfolio shouldn't suffer long-term losses even during the worst market crash. Individual investments may perform poorly and it may sometimes take longer than you like for things to turn around. But as a general rule, a well-balanced portfolio full of solid investments should earn a positive return over time.
You can't control when the crashes will happen, but you can make sure you have the right level of risk exposure, maintain a solid investment thesis, and don't react based on emotion. If you do these things, and keep investing even during a downturn, you should have nothing to worry about.
