The stock market could very well crash in the coming months. This might sound like bad news if you have a lot of your hard-earned money invested and you're afraid to see your portfolio balance fall.
But a market crash isn't something to fear. In fact, there are three big reasons you shouldn't be concerned as long as you've got investments you believe in.
Image source: Getty Images.
1. Market crashes are inevitable
Worrying about a stock market crash is like worrying about a rainstorm. It's not worth it because a crash is as inevitable as a rainy day. Crashes have always been part of the natural economic cycle and if you are prepared, you can easily weather the storm.
But just because you don't need to worry about rain doesn't mean you shouldn't have an umbrella. In this case, your umbrella is a portfolio strong enough to make it through unscathed. Doing this involves smart strategies including investing for the long term and building a portfolio made up of a diverse mix of assets.
2. Recoveries always follow crashes
A market crash can send your investments plummeting, but just as there have always been crashes, recoveries have always inevitably followed like a rainbow after a storm.
The recovery may take months, or even years. But over time, the market has consistently gone up and never experienced a downturn that didn't eventually reverse itself.
If you have investments you believe in, just hold them through the crash and wait for the price of your shares to bounce back. Any losses will be temporary and only on paper, and you should end up earning positive returns over the long haul if you've invested wisely.
3. Crashes present buying opportunities
Lasty, rather than worrying about a market crash, you should view it as an opportunity. Contrary to what your instincts may tell you, it's a good idea to invest more when a crash has occurred. You can buy shares of good companies when they are on sale and benefit from the discount.
You don't necessarily want to try to time the market to buy at rock-bottom prices since you can't always tell exactly when the crash will end and recovery will begin. So if you consistently buy stock as prices fall, it's inevitable that you'll buy some shares at an opportune time and see more profit because of it.
What should you do instead of worrying?
If you want to make it through a crash unscathed, there are a few key things you need to do.
First and foremost, don't invest in anything that you wouldn't be prepared to hold through a downturn. If you're trying to make a quick buck with a short-term investment and you don't trust that the company can survive tough economic times, you could suffer permanent losses if you have bad timing and buy before a crash occurs.
Second, aim to have some cash available to invest when a crash happens so you have the opportunity to take advantage of discounts in companies you believe in.
And third, never panic-sell because doing so just locks in losses. Avoid checking your portfolio obsessively when times are tough and have enough confidence in your investment thesis to sit back and wait for the turnaround to come and your investments to rebound.
If you do these three things, a market crash shouldn't be cause for any concern.
