If you're finding yourself in this exact same position and panicked about your investments, you are not alone. But you shouldn't be concerned about a stock market crash for these 3 reasons.
1. Stock market crashes are cyclical
Stock market crashes are unavoidable because they are a part of a normal stock market cycle. And if you're invested for the long term, you could experience a few of them. But they happen less often than you might think. In fact, over the last 30 years, only three stock market crashes have happened. The dot-com bubble burst in the early 2000s and in that same decade, investors endured the Great Recession, which lasted from 2007 to 2009. The most recent crash occurred in 2020 due to Covid-19 fears. A stock market crash doesn't necessarily mean that you'll lose money permanently; despite a 34% loss in March 2020, large-cap stocks finished 18% higher at the end of the year than when they started. Even during the Great Recession and the dot-com era when you would've ended the year with a loss, you would've recouped your money within four years.
If you're afraid of losing money, it might be because you're invested in securities that are too risky. Instead of trying to avoid a crash, you can make sure that your risk tolerances are in line with how you are invested. Taking an easy quiz that examines your feelings about volatility as well as how you've reacted to it in the past can be a great way of gauging your comfort level. It also may help you stay invested through a period of falling prices. In a year like 2008, you would've lost 37% of your wealth if you were invested in large-cap stocks but only 16% if you had a portfolio of half bonds and half stocks. As a result, you would have survived this period of time better.
2. Stocks get cheap during a stock market crash
You can buy your investments for cheaper prices during a stock market crash. If you invested in the S&P 500 at the bottom on March 23, 2020, your accounts would be up by 90% by now. An investment of $10,000 into this index would be worth almost $19,000 today. Even if you'd bought into it a month after the bottom, your shares would have experienced a 50% return, and that same $10,000 would be worth $15,000 today.
Timing the stock market is difficult, though. Although in this particular instance, the stock market had a quick recovery, it's possible that the opposite could've happened, and your investment in March 2020 would've gone down even further before going back up. Using dollar-cost averaging to buy shares is a great way of steering clear of this guessing game. When you use this strategy, you're buying a certain amount of an investment every month. Some months you get higher prices. And in months when shares lose their value, you'll get lower prices. But you won't end up putting a lump sum of money into the market just before it experiences significant losses.
3. Focus on a long time horizon over year-to-year ups and downs
If you invested in the S&P 500 in January 1990, you would've experienced six years of negative returns over the next 30 years. But in the remaining 24 years, you would've had gains, and $10,000 invested in this index in Jan. 1, 1990 would've experienced an average rate of return of more than 10% and grown your accounts to over $200,000 by Dec. 31, 2020.
Average rates of return like this can help you predict how your accounts will grow and include good years, bad years, and flat years. And missing any of these years could change your average rate of return dramatically. That's why staying invested over the entire period is important. Setting your time horizon, or how much time you have to accumulate money is an important first step before buying shares. The longer you have, the more aggressive your accounts can be invested, and if that time span is shorter, you should primarily hold conservative investments.
Stock market crashes can be scary because you could lose a large percentage of your wealth in a short period of time. But even though they will occur, they are temporary and don't happen often. Knowing this information won't stop you from losing money, but it could help you think of your long-term goals and help you put the short-time losses into perspective.