Will the stock market crash in 2021? That's the big question on a lot of people's minds. Of course, without a crystal ball, it's impossible to predict how stocks will fare in the coming year. But here's what we do know:
- The coronavirus pandemic isn't over
- Vaccines won't be widely available for months, and even then, a large chunk of the public may not be open to them
- Many stocks are overvalued right now, and that's a recipe for a correction at the very least
But while the idea of a stock market crash may seem daunting, you don't have to live in fear of one. Here's why.
1. You won't lose money if you leave your investments alone
The only way to lose money on stocks is to sell them when they're down (and even that could, in some cases, work to your advantage thanks a strategy known as tax loss harvesting). If you pledge to leave your portfolio alone during a stock market crash, you may not lose so much as a dime. Of course, to pull that off, you'll need a healthy emergency fund so that if you land in a cash crunch, you won't need to liquidate investments to access money. Ideally, you should try to have anywhere between three and six months' worth of living expenses tucked away in the bank, where your principal is protected.
2. You may have an opportunity to buy stocks on the cheap
When stock values decline, it gives you, as an investor, an opportunity to scoop up investments at a lower price. And that's a good thing. Now to take advantage of buying opportunities, you'll need cash on hand, and that money shouldn't come out of your emergency fund. Rather, you should keep extra cash in the bank, or put some into your brokerage account.
3. The market could recover quickly
Back in March, we entered our first bear market in more than a decade, and it was a doozy. But as of November, the Dow, for example, had completely recovered from its losses that took place earlier on in the year and subsequently went on to hit a record high. In fact, stocks are looking at a strong finish to 2020 despite the upheaval the pandemic has caused, and it just goes to show that not every market downturn lasts years. Some bear markets last only a handful of months, so even if things do go south in 2021, the pain may be relatively short-lived.
We don't know how stock values will trend in 2021, but rather than waste energy stressing out about a stock market crash, map out a plan for how you'll deal with one. At the same time, make an effort to boost your cash reserves so you have both buying opportunities as well as the option to leave your portfolio alone. It may very well be the case that stocks hold steady for the duration of the coming year, but it's better to be prepared for the opposite scenario in case it comes to be.