Are you worried that a stock market crash is coming? It's the million-dollar question that you may have been asking yourself for a while. We're 12 years into the longest-running bull market and like many investors, you may be bracing yourself for losses.
And while it's very possible that a crash might be around the corner, I'm not worried or making any changes to my investments for these three reasons.
1. Long-term investments aren't impacted as much
When will you be using your money? If it's for something like retirement, you may not need it for 25 years. And if you invested your money over any 25-year time period, you would probably have significantly more at the end of it.
Between 1995 and 2020, the S&P 500 experienced an average rate of return of 10.54%, and $10,000 invested would've grown to $135,300. Between 1990 and 2015, this index got an average rate of return of 9.30%, and $10,000 would've grown to $100,900. And between 1985 and 2010 it was 10.78%, and $10,000 would've grown to $143,100.
But the best way you can capture rates of return similar to this index is by keeping your accounts fully invested. Missing just a few days could reduce your rate of return by quite a bit. And the more days you missed, the more dramatic this effect would've been. The table below provides some examples of how missing some of the best-performing stock market days can cost you big.
|Average rate of return||$10,000 invested between Jan. 2, 2000 and Dec. 31, 2020|
|Missed 10 best days||3.35%||$19,347|
|Missed 20 best days||.69%||$11,474|
|Missed 30 best days||-1.49%||$7,400|
|Missed 40 best days||-3.44%||$4,969|
|Missed 50 best days||-5.21%||$3,430|
|Missed 60 best days||-6.81%||$2,441|
When you're losing money, your gut reaction may be selling your investments so that you can stop the losses. But doing so may result in missing crucial recovery days and could bring your average rate of return down. That's why time in the market is so important, and staying invested even during a period of losses is vital for long-term success.
2. They're great buying opportunities
If you bought into the stock market at the bottom of a crash, your returns would be even larger. For example, if you'd invested in the S&P 500 on March 23, 2020, you would've had a 68% rate of return for the year, instead of investors who held the same investment for the entire year and saw an 18.4% increase in their investment.
Timing the market is incredibly difficult, though. And if you guess wrong, you could end up worse off -- like if during this same time period the stock market declined even further before recovering. But you can help ensure that you get some shares of your holdings at a lower price by implementing a strategy like dollar-cost averaging.
When you do this, you allocate a certain amount of money each month for purchasing shares. Some months they will trade higher than others but some months will trade lower. Most importantly you won't spend too much time worrying about whether or not it's the wrong time and can feel good about committing to buying during all market cycles.
3. Historically it's typically followed by a longer period of recovery
In March 2020, when the S&P 500 lost 34% of its value in one single month, you may have mentally prepared yourself for the worst. But this recovery was quicker than most people expected, and if you stayed invested, you would've gotten everything back in 4 short months.
From 2000 to 2002, the stock market had combined losses of 43.1% because of the dot-com bubble bursting, and even then, you would've been rewarded with five years of gains after and recouped everything you'd lost in four years. The Great Recession happened in 2008 and you would've lost 37% of your wealth in one year -- which can be scary. But you would've recouped everything by 2012. .
History is no guarantee of what will happen in the future. And you could suffer a stock market crash where it takes longer than 4 years before your investments are made whole. But so far, no stock market crash has lasted forever and there have only been four significant stock market crashes affecting the U.S. stock market since 1987. And in that same time period, the good years have far outweighed the bad with only six years of losses but 27 years of gainsStock market crashes are inevitable. And if you're invested for the long haul, you'll probably experience at least one over your investment time horizon. Attempting to avoid it could cost you big, but learning how you can manage your emotions can help you better meet your goals and get the most out of your investments.