Stock market crashes happen. Since the end of World War II, the benchmark S&P 500 has tumbled 10% or more 27 separate times. Crashes have been slightly more common this century, however, with corrections of 10% or more occurring in 12 out the last 21 years, and we're close to entering into correction territory again.
Not only will a correction definitely happen, a bear market of at least a 20% decline will also eventually recur. The crash of 2020 due to the onset of the global pandemic saw the Dow Jones Industrial Average lose 37% of its value between February and March, the worst decline on record. In fact, 2020 claims the seven worst one-day drops in market history, as well as eight of the 10 worst days.
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Soaring inflation, stubborn supply chain issues, and a Federal Reserve ready to raise interest rates in 2022 to combat runaway price increases could all send the markets tumbling again.
Despite that, there are actually some very good reasons investors should not only not fear a correction or a bear market but ought to welcome one. No one likes to see their portfolio value decline, but here are six reasons why a stock market crash may not be as bad as you think.
1. Stocks will come back
For pretty much as long as people have been investing, stretching even as far back as the 1600s tulip mania in The Netherlands, busts have followed booms, which are followed by new booms. As mentioned, just looking at the U.S. market, there have been 27 separate instances since the end of World War II where the benchmark S&P 500 has tumbled 10% or more.
The Schwab Center for Financial Research says the average bear market lasts only about 17 months, and 80% of corrections since 1974 have not turned into a bear market.
The Great Recession of 2007-2009 was one of the longest we've had to endure, but it turned into one of the biggest, longest running bull markets of all time, so investors need to keep downturns in perspective.
2. Stocks become more affordable
The most obvious result of a stock market crash is that stocks, well, become cheaper. Just as a rising tide lifts all boats, a tide running out causes them to fall. Stocks that were expensive beforehand are now affordable.
The S&P 500 is currently priced at more than 25 times its earnings, albeit lower than where it stood at the beginning of the year prior to the market's current pullback, but still well above its historical median of under 15 times. A market crash will dramatically narrow that gap once more.
That also means it's time to go shopping. Stocks that you were watching but thought too expensive, as they were carrying sky-high PE ratios of their own, will now be within reach. It opens up opportunities to further diversify your portfolio. You're not going to catch the exact bottom, so prepare for further declines after you purchase shares, but buying cheap and selling expensive is how fortunes are made in the market.
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3. Understand your appetite for risk
A steep stock market crash can shake the resolve of even veteran investors, and it should provide you with the chance to understand how much risk you can tolerate. Because markets do rise and fall, if you're the type of investor who frets over such volatility, a correction may be the time to reevaluate your investment strategy.
Index funds are a perfectly acceptable option for many investors and could be best for those seeking to soften the blow a crash will land. While index funds and exchange-traded funds are not immune from a loss in value, the fact that they spread their holdings across so many stocks minimizes the impact any one company can have on a portfolio.
4. Get to know your stocks better
When you bought your stocks, you should have had an understanding of why you were purchasing them. Hopefully it wasn't because of some tip you heard on an internet stock board, but rather because you found they were well-run businesses with good prospects for growth that made you want to hold on to it for a minimum of three to five years, but better for a decade or more.
A market crash is a good gut-check time to revisit your holdings and make sure the rationale you used remains intact. Don't make an emotional decisions to sell just because share prices are down; if the growth story is still good, that could mean it's the perfect time to buy more. So knowing the reasons you bought a stock and ensuring they are still valid will prevent you from making irrational choices because it looks like the sky is falling.
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5. Get more for your money
Yes, a stock market crash means you get to buy stocks cheap, but it also means you get more for your money. Particularly for investors with a dividend reinvestment program (DRIP) or who are always adding new money to their accounts at regular intervals, whether every paycheck, monthly, or on some other schedule, the dollar-cost averaging that naturally occurs on the market's way down reduces your average purchase price over time. You end up with more stock in the good companies you've picked at lower cost.
6. Save on taxes
While a market crash can be the perfect time to go on a shopping spree, it may also be the opportunity to look to sell some of your losers. Tax-loss harvesting lets you offset gains you've made or income you've brought in with losses that you realized. That could help you ultimately lower your tax bill.
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Don't fear the downdraft
It's understandable we all want our portfolios to rise in value, and seeing the numbers turn red -- sometimes by big percentages -- is never an enjoyable experience. But it's also not a time to panic, and because you should always be prepared for a stock market crash, it's not something to fear and could be the perfect opportunity to help your portfolio achieve those fantastic, outsized returns you're looking for over time.
