The stock market has been rocky lately, and that volatility can be concerning to investors. Coupled with the economic uncertainty we're facing right now (including surging inflation and potential interest rate hikes this year), some investors worry a crash is looming.
To be clear, it's impossible to say for sure whether a market crash is coming or not, as even the experts can't predict exactly how the market will perform in the short term.
While nobody knows for sure what's in store for the stock market, there are a couple of reasons you shouldn't worry about a potential crash -- as well as two instances when a downturn could be cause for concern.
Image source: Getty Images.
Why you shouldn't worry about a crash
1. The market will eventually rebound
Market crashes can be intimidating. Regardless of how long you've been investing, it's nerve-wracking watching your portfolio sink in value.
The most important thing to remember during times like these, though, is that the market as a whole has a very long history of recovering from downturns. In fact, since 1928, the S&P 500 has fallen by more than 20% on 21 separate occasions. And each and every time, it eventually bounced back.
Of course, it can sometimes take months or years for the market to fully recover from a crash. But historically, it has always managed to rebound stronger than ever.
2. Timing the market is nearly impossible
In theory, the best investing strategy would be to pull your money out of the market right before prices fall, then reinvest when they're at rock bottom. This is called timing the market, and it's a strategy some short-term investors use to make a quick profit.
However, this tactic is nearly impossible to pull off successfully. Because the market is unpredictable, no one can say exactly when it will crash or when prices will bottom out. In many cases, the market will dip only to rebound a day or two later.
If you sell and prices quickly recover, you'll miss out on those potential gains. Similarly, if you wait too long to sell and prices have already fallen substantially, you may end up selling at a loss.
A safer bet, then, is to simply hold your investments regardless of what the market is doing. If prices drop, try your best to wait it out until they eventually recover.
When a potential crash could be concerning
1. You're investing too much money
Although market downturns are normal (and an inevitable part of the market's journey), there are some instances where a dip could potentially hurt your finances.
It is possible to invest too much money in the stock market, especially if you're investing cash you can't afford to lose.
When the market takes a turn for the worse, stock prices may fall significantly. This makes downturns a particularly bad time to sell your investments. If all your cash is tied up in stocks and the market crashes, you could be in a tight place financially if you incur an unexpected expense.
For that reason, it's wise to double-check that you have an emergency fund stocked with at least six months' worth of savings. Not only will this protect your finances in the short term, but it will also make it easier to keep your money in the market -- thus helping your investments grow more over the long run.
2. You're not investing in the right places
The stock market itself has a long history of recovering from downturns, but that doesn't necessarily mean that all individual stocks will be able to bounce back, too. Low-quality stocks may not be strong enough to weather severe volatility, and if you have a lot of these investments in your portfolio, your savings could be at risk.
Before a downturn hits, examine each investment in your portfolio and ask yourself whether its fundamentals are strong enough to survive volatility.
Of course, nobody can predict exactly how a stock will perform, but the healthiest investments have solid financials, a competent leadership team, and a competitive edge in their industry. With strengths like these, a company has a better chance of recovering from a market downturn.
Market dips can be daunting, regardless of whether you're a new or longtime investor. By taking steps to prepare and maintaining a long-term outlook, however, your portfolio is more likely to thrive no matter what happens.
