The only thing predictable about the stock market is that it's unpredictable. After a record-shattering year, the market has continued its upward climb. Some investors worry, however, that all this growth signals that a crash is coming soon.
While nobody can predict when a market downturn will occur, it's certain that it will happen eventually. The market can't climb forever, so sooner or later it will take a fall.
If you're worried about an upcoming crash, you may be tempted to start stashing cash and limiting the amount you invest. However, there are a few reasons why you don't need to worry.
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1. Downturns can be great investing opportunities
Market downturns can be daunting, but there is a bright side: It's a more affordable time to invest.
When the market is up, stock prices are increasing. And during a market downturn, stock prices fall. When the market is down, it can be a great opportunity to buy stocks when they're "on sale." Some stocks cost hundreds or thousands of dollars per share, so waiting until a market downturn to buy can be a smart move.
This doesn't necessarily mean you should buy any stock simply because it's more affordable, however. Make sure you're only buying stocks that have a strong track record and are likely to perform well over the long run. If you buy risky companies only because they're cheap, you could still lose money.
Before you buy anything, though, make sure you can afford to invest. Since stock prices are lower during market downturns, it can also be a bad time to sell your investments. If money is tight and you may need to sell your investments in the near future, you're better off waiting to invest until your financial situation is stronger.
2. Not investing can be risky, as well
If you're considering pressing pause on investing or even pulling your money out of the stock market altogether, keep in mind that this strategy comes with risks, too.
When you stop investing, you miss out on the benefits of dollar-cost averaging, when you invest consistently no matter what the market's doing. While you'll end up investing when stock prices are high, you'll also be buying when prices are lower. Eventually, those highs and lows should average out.
If you press pause on investing when the market starts to take a turn for the worse, you're only buying stocks when prices are high but not when they're low. This means that over time, you're potentially paying more, on average, than you would if you'd continued investing during market downturns.
3. The market will always recover
The stock market has seen some dark times over the years, yet it's always been able to bounce back from even the worst crashes eventually.
During the past couple of decades alone, the market has experienced the dot-com bubble burst, the Great Recession, the COVID-19 pandemic, and countless other corrections and downturns. Despite everything, though, it's still going strong.
The key to surviving a market crash is to make sure you're investing in the right places. The safest options include investing in broad-market funds, like an S&P 500 index fund. These funds include hundreds of stocks from the strongest companies in the U.S., so they're more likely to survive market volatility.
If you choose to invest in individual stocks, do your research to make sure you're investing in strong, healthy companies. Organizations with solid fundamentals are more likely to grow over the long term and bounce back after market downturns.
Stashing cash and avoiding the stock market during periods of volatility may seem like a smart option, but you could miss out on more than you think. As long as you can afford it, continuing to invest regardless of what the market does can help you make the most of your money.
