This year has been rough so far for the stock market, with the S&P 500 falling nearly 8% in the first three weeks of January.
While the market has started to rebound, the future is still uncertain. There are plenty of factors that could cause turbulence within the market, like surging inflation, the continued toll of the COVID-19 pandemic on the economy, and the Federal Reserve raising interest rates later this year.
Does this mean a market crash is inevitable? Here's what you need to know.
Will the stock market crash in 2022?
The most important thing to remember about the stock market is that in the short term, it's unpredictable. But over the long run, it's incredibly stable.
Nobody knows for certain how the market will perform over the next few days, months, or even years. But over the course of several decades, the stock market is almost guaranteed to earn positive average returns.
While the market will experience short-term volatility, those ups and downs average out over time. Historically, the S&P 500 has earned a positive average return of around 10% per year. On a year-by-year basis, though, it's not uncommon to see returns far above and below that level.
What does this mean for 2022? It means that although nobody knows exactly what will happen this year, it shouldn't make a difference to your long-term strategy.
How to prepare for a potential crash
Even with a long-term outlook, it's normal to worry about how a potential market downturn could affect your portfolio. Fortunately, there are a few things you can do to give your investments the best chance of surviving a crash.
1. Build a proper emergency fund
First, make sure you have enough cash set aside to avoid pulling your money out of the market. Downturns are some of the worst opportunities to sell your investments, because stock prices are lower, and you could end up selling for a loss.
It's wise, then, to make sure you have at least six months' worth of savings in an emergency fund. This way, if you lose your job or face an unexpected expense, you can leave your investments alone until the market recovers and prices bound back.
2. Allocate your investments properly
Next, double-check that your portfolio is allocated appropriately for your age. If you're closing in on retirement, your portfolio should be more conservative than that of someone just starting their career. When you're investing more heavily in bonds and other conservative investments, a market crash is less likely to wreck your retirement plans.
That said, it's still wise to invest at least a portion of your portfolio in stocks to help your money grow faster. A common rule of thumb is to subtract your age from 110, and the result is the percentage of your portfolio that should be allocated to stocks.
3. Choose the right investments
One of the most critical components of surviving a market downturn is choosing the right investments. Healthy companies are more likely to pull through periods of volatility, while unstable stocks may crash and never recover.
To determine whether your stocks are solid long-term investments, look at their underlying business fundamentals. Are the company's financials in good shape? Does it have a competent leadership team? Has it experienced market volatility in the past?
When it comes to choosing stocks, the more research you can do, the better. By filling your portfolio with strong investments and keeping a long-term outlook, you'll be prepared regardless of what the future holds for the stock market.