The stock market has always been a rollercoaster of ups and downs, but 2020 has been a particularly wild ride. Earlier this year the market plummeted and experienced one of its worst quarters in history. Then just months later it was reaching record highs.
Early in September, however, the market began to slump again. It has now reached correction territory, meaning the market has dropped by at least 10%. Whether this downturn will continue to worsen is anybody's guess, but with the country experiencing political turmoil and an uptick in COVID-19 infections, there's a chance more volatility is on the way.
While an unstable stock market may be nerve-wracking, there's one secret that can help you survive even the worst crashes: Invest for the long-term.
Investing for the long-term can save you money -- and stress
The stock market is unpredictable, even for the experts. It's almost impossible to predict exactly when stock prices will rise or fall, making it extremely challenging to time the market. Buying or selling at the wrong time can be a costly mistake, too, not to mention the stress involved.
When you buy and hold your investments, though, you don't have to worry as much about short-term volatility. After all, if you're not planning on selling your investments anytime soon, it won't matter what the market does right now. So even if stock prices are in a free fall, you can simply sit back and wait for your investments to recover.
The key to long-term investing is ensuring you're investing in the right places. If you throw all your money into an up-and-coming stock and that company doesn't survive a market crash, you'll be out of luck. But if you invest in solid long-term companies that have proven track records of surviving tough economic times, it's more likely your investments will pull through.
Where should you invest?
Exactly where you should invest depends largely on your investment strategy and risk tolerance. If you're aiming to avoid as much risk as possible, your best bet may be to stock up on index funds.
Index funds follow the market, so if the market crashes, your index fund will take a turn for the worse as well. However, because the market has always recovered from every downturn it's ever experienced, there's a very good chance your index fund will also bounce back.
The downside to index funds, though, is that because they're designed to simply follow the market, it's impossible for them to beat the market. If your primary goal is for your investments to survive a market downturn, beating the market may not be a priority. But if you are looking for higher-than-average returns, you may choose to invest in exchange-traded funds (ETFs) or individual stocks.
ETFs are collections of stocks that often track particular industries or sectors. They're less risky than investing in individual stocks because they provide more diversification, but they're also not as safe as index funds because most of them only focus on certain industries rather than the stock market as a whole.
You may also opt to invest in individual stocks, which gives you the greatest control over your investment portfolio. This option does require a significant amount of research to ensure you're investing in the right stocks, but doing your homework can pay off. Just remember to keep a long-term focus rather than jumping on any short-term trends.
The stock market will always experience volatility, so there's no way to avoid it entirely. However, by taking a long-term investing approach, short-term ups and downs don't have to keep you up at night.