The last few weeks have been rocky for the stock market. The S&P 500 has fallen by roughly 7.5% since the beginning of the year, and the Nasdaq is down nearly 12% in that timeframe.
There are also signs that more volatility could be coming. Inflation has soared, recently reaching a 40-year high. The Federal Reserve also announced that it plans to raise interest rates this year in an effort to slow inflation. Continued struggles with supply chains and the spread of the COVID-19 omicron variant could potentially fuel more volatility as well.
Does this mean a market crash is looming? If so, what should you do with your investments? Here's what you need to know.
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Is a market crash on the way?
Although the market has been bumpy lately, that doesn't necessarily mean a crash is looming. The stock market is famous for its unpredictability. Despite several factors that could potentially result in increased turbulence, such as inflation and rising interest rates, it's impossible to know for certain whether the market will crash.
It can be tempting, then, to stop investing or pull your money out of the market. However, that can sometimes do more harm than good.
Because the market is unpredictable, there's a chance it could continue surging after this rough patch. If you had pulled your money out of the market after the crash in March 2020, for example, you might have missed out on one of the greatest rebounds in stock market history.
Also, it's extremely difficult to time the market successfully. If you withdraw your investments now, you'll eventually need to reinvest. Choosing the exact right moment to stop and start investing is nearly impossible, because the market is constantly fluctuating.
What should you do with your investments?
In times like these, it can seem like there's no right answer. The market may or may not crash in the future, but pulling your money out is also risky.
However, it's easier than you may think to protect your investments. In this type of situation, one of the best moves you can make is to hold your investments and simply ride out the storm. In other words, do nothing and wait it out.
Even if the market does crash, you don't lose any money unless you sell. Your stocks could drop in value in the short term, but the market itself will inevitably bounce back. It could take months or years for it to fully recover, but historically, it has recovered from every single crash. By simply waiting it out, your portfolio should eventually rebound as well.
The key to surviving a market crash, then, is to make sure you're investing in strong stocks. Companies that have solid underlying fundamentals -- such as strong financials, a competent leadership team, and a competitive edge in their industry -- are more likely to survive periods of volatility.
Nobody knows for certain whether a market crash is looming, but that doesn't mean you can't prepare. By filling your portfolio with strong stocks and holding them for the long term, you can ensure you're doing everything possible to protect your investments.
