It's been a tumultuous year for the stock market, with major indexes still down substantially from their peaks. Combined with the ongoing concern over a recession and a potential stock market crash, it can be a nerve-wracking time to invest.
Amid all this uncertainty, it's natural to question how safe the stock market really is. When your life savings are on the line, nobody wants to lose money by investing at the wrong moment.
While there are legitimate concerns when it comes to the market, over the long term, it's safer than it may seem. Here's why.
Long-term performance is king
Volatility is common in the short term, and even the experts can't predict exactly how the market will perform. There is a chance that a stock market crash is looming, and your portfolio will likely drop in value temporarily if that happens.
However, short-term ups and downs are not as important as the market's long-term performance. Regardless of what happens over the next few weeks or months, the market is extremely likely to see positive average returns over time.
In other words, even if the market crashes tomorrow, you can still make a lot of money in the long run.
Case in point: In the last two decades alone, the stock market has experienced the dot-com bubble burst, the Great Recession, the crash in March 2020, and countless smaller downturns along the way. Despite everything, though, the S&P 500 is up nearly 170% since 2000.
Also, the S&P 500 has historically earned an average rate of return of around 10% per year. That means the good years and bad years have averaged out to returns of roughly 10% per year over the long run.
These returns are substantially higher than you'd see by stashing your money in a savings account, which only offers interest rates of around 1% to 2% at best. At that rate, your money is not even keeping up with inflation, meaning it will lose buying power over time.
Risks to consider before you invest
The stock market is a wealth-generating powerhouse, and investing is one of the most effective ways to grow your savings. But it's the best fit for those who have at least several years (or ideally a couple of decades) to leave their money in the market.
Because the stock market can be unpredictable, nobody knows exactly how it will perform over the coming months. And if we do face a more severe recession or crash, it could potentially take years for the market to fully recover.
That's normal, and it's not necessarily a bad thing. But if you're close to retirement or expect to need your savings in the next year or two, it can be riskier to invest right now. If stock prices fall and then you decide to withdraw your savings, you could end up selling your investments at a loss.
Investing in the stock market can be intimidating, especially during periods of volatility. But over the long term, it's one of the safer ways to generate wealth. By continuing to invest even when the market is shaky, you'll reap the rewards down the road.