The stock market was remarkably strong in both 2020 and 2021, buoyed both by stimulus money and by an exceptionally accommodative Federal Reserve. With valuations stretched by historical measures, the Federal Reserve looking primed to taper in 2022 due to inflation, and stimulus payments largely in the past, those bullish factors are starting to reverse. That could cause serious problems for stocks.

That raises a very key question: Should you really be investing in the stock market in 2022? The stock market could easily crash again, and money you invest just before a crash could take years to recover to what it was when you invested it. On the flip side, there are no guarantees that the market will crash in 2022. If you pull your money out and miss out on further growth, you could regret that, too.

Rather than get paralyzed into inaction by all that uncertainty, it's a better idea to take advantage of what the market is currently offering you. With a little bit of smart planning now, you can set yourself up to continue investing in stocks in 2022, while still protecting your overall finances from the near-term risks from the current lofty market. Read on to figure out a strategy that could keep you invested in stocks, despite the turbulence that may be headed our way.

A couple working with an investment advisor.

Image source: Getty Images

First, get out of most debt

If you've got debt, think long and hard about using the gains the market has given you to retire it. As a general rule, debt that might be worth holding on to has three key characteristics:

  • It's at a low enough interest rate that you have a reasonable shot of beating the cost of that debt with the net returns you earn on your investments over time.
  • It has a low enough minimum monthly payment that you can cover it without it causing undue stress on your core lifestyle.
  • You can connect that debt to a key purpose for your future (like a home, the ability to earn a living, or life-sustaining medical treatment).

Unless all three of those conditions are true, it's nearly always a good idea to pay off your debts rather than try to manage through them. That holds true in all market conditions, but it especially holds true when the market is rocky. It's tough enough to stay invested when the market is falling, and if you add rough debt pressures to the natural temptation to sell when the market is down, it gets that much tougher.

Add to it the risk of job losses and tough markets often going hand in hand , and getting out of most debt is really one of the best things you can do to keep yourself invested in 2022.

Next, have money set aside for emergencies and your near term needs

Having an emergency fund with three-to-six months' worth of your living expenses is a critical part of being able to stay invested in tough times. That emergency fund can keep you from being forced to sell your stocks while the market is down to cover surprise expenses or your overall costs during a temporary period of unemployment.

On top of that emergency fund, you should ask yourself if you expect to spend any money from your investments over the next five years. If so, that money should not be invested in stocks. Yes, you'll likely lose purchasing power vs. inflation in most lower-risk investments, but you'll also be protecting yourself from the risk of missing out on a key life goal just because of a bad market.

In addition, by not putting your nearer-term goals at risk due to the stock market's whims, you can better psychologically handle the market's ups and downs. Because your near term needs are covered by other methods, you can better build your stock investing around your longer term goals and focus on companies likely capable of being there for that long run. That helps you better stay in control of your fears in a down market, which can help you make more rational decisions.

Finally, recognize the value of what you own

Ultimately, a share of stock is nothing more than a partial ownership stake in a company. Companies generally exist only as long as they generate sufficient cash from their operations. If they don't generate sustainable amounts of cash, then they last only until their financiers' patience (and related debt covenants) wear out.

That might sound harsh, but from your perspective as an investor, it really should be both liberating and empowering. Because what it means is that you can estimate a reasonable value for any company's stock based on projections of its ability to generate cash over time. Using a method called the Discounted Cash Flow model, you can typically get directionally useful valuation estimates using those cash flow projections and a reasonable risk assessment for investing.

With a decent valuation estimate, you can recognize when a company is trading at a discount to a fundamentally supportable price based on its ability to generate cold, hard cash. That's how you can train yourself to recognize cases when a stock was worth buying at $100 and is even more worth buying at $50, because the price dropped but the fundamental value did not.

With that type of attitude, you can actually get yourself in the position of being willing to buy more shares when a strong company is available for an objectively cheap price. That can put you in a position to where you're willing to buy a solid company at a decent-to-cheap valuation no matter what the rest of the market is doing. More than anything else, that attitude and toolset might be able to keep you investing in the stock market in 2022.

Get yourself ready to invest in 2022

When your finances are in decent shape, your near-term needs can be handled outside of your stock portfolio, and you have a decent handle on value, you can be a stock investor in almost any market. If you've still got some work to do to prepare yourself, then there's no time like the present to get started. Once you've got the right foundation in place, you just might find 2022 to be a great year to invest in the stock market.