Will the market crash, or won't it? It's a question many investors are asking themselves now that the market's hinting that it may not be as resilient as it has been since March of last year.
The S&P 500 (^GSPC -0.22%) is only down a little more than 2% from its early September highs, but things feel different about this lull. Not only is this usually a tough time of year for the market, but a couple of indices (and some individual stocks) are starting to trade under key levels that technical analysts have been eying for a while. When those lines in the sand are crossed, they don't change long-term fundamentals, but those events can certainly signal -- and even start -- steep sell-offs.
The thing is, even if a major correction is in the cards, don't sweat it. Here are four specific reasons why you don't need to panic.
1. Corrections and bear markets happen, but they've never been permanent in the U.S.
Just since the rebound from 2008's subprime mortgage meltdown and subsequent bear market, the S&P 500 has fallen by at least 10% (from high to low) 11 different times. The index has also tumbled by more than 20% from peak to trough twice during that time frame -- bear markets in their own right by the most common definition of what constitutes one. That's more or less the same pace and rate of corrections the market experienced prior to 2008, going back nearly 100 years to the crash of 1929.
The number of these big declines that didn't eventually get wiped away with rebounds back to pre-crash peaks and beyond? Zero. Nada. Zilch. Some of Wall Street's plunges have taken longer than others to unwind, but thus far, every single one has been followed eventually by a run-up to new record highs.
For better or worse, corrections are the market's way of reassessing what investors are willing to pay for stocks relative to their risks. The underlying drivers of economic growth have never really gone away though, and the ability to benefit from that growth is ultimately what stock investments are meant to offer investors.
2. Crashes are impossible to predict accurately anyway
There's a famous quote from economist Paul Samuelson: "The stock market has predicted nine of the past five recessions."
That quip has since become an overused cliche, but it's informative all the same. Investors tend to anticipate a great number of negative situations that never come to pass, missing out on opportunities as a result.
That's not to suggest crashes and recessions don't happen. The fact is, however, we never really know the true condition of the economy at any specific time until well after the fact when the indicative data is published, at which point, it doesn't really help with making investing decisions anymore. Guessing about economic conditions and short-term directions is a game best left unplayed. Staying invested in stocks even when things feel scary is statistically the better bet.
3. Stress causes you to make bad decisions
Not only is predicting pullbacks difficult to do with any degree of accuracy, but the stress associated with trying to perfectly time your entries and exits into stocks can cause you to make ill-advised decisions.
There's a science-based explanation of why this is so. A 2017 study performed by MIT researchers determined that chronic stress explicitly leads people to make higher-risk decisions, by over-activating the neurons in your medial prefrontal cortex. This effectively blurs the mental lines that divide good choices from bad choices.
Image source: Getty Images.
In a similar but simpler vein, consider the fight-or-flight dichotomy we all face when put into speed-sensitive, stressful, life-or-death situations (and financial ones, too).
Your brain is actually doing something quite clever in these instances (from an evolutionary perspective), mostly to give your body its best chance of survival. Namely, it's limiting your focus to your two best accessible options given the circumstances. One them is fleeing via the safest route, and the other is fighting your threat head-on in a way that allows you to see everything you can about the danger. Your brain deliberately doesn't serve up more nuanced alternatives when you're feeling pressured, as simplicity translates into vital decision-making speed. For investors though, it's often one of the nuanced, in-between options -- like selling just some of your stocks -- that would be the wisest choice.
So, take a breath, take a step back, and remember that choosing not to do anything at all is a viable choice. You just have to make that decision in advance and tell yourself to stick with it even when the market is plunging.
4. Corrections are buying opportunities
Finally, investors should keep in mind that pullbacks are buying opportunities for stocks that were previously too expensive to step into.
Holding on to that idea is easier said than done. Jumping into new stocks while they're falling feels about the same as trying to catch a falling knife ... dangerous (not to mention stressful). Just keep reason No. 1 in mind though. Historically, U.S. stock market corrections have eventually stopped and reversed. Most of them stopped and reversed sooner than later.
And if you're still struggling to view big dips as buying opportunities, here's one last tip that should help: Make your "buy" list beforehand. Pick the stocks you want to purchase and the top prices you're willing to pay for them before any marketwide correction. That way, once things start to fall apart, you'll have a plan in place that was crafted before you were being swayed by the emotions that swell up when the market is crashing. That's half the battle.
