10 Reasons Why You Shouldn't Worry About a Stock Market Crash

Since the market bottom on March 23 last year, the S&P 500 has gained 77%, a remarkable run and one of its best performances ever in a one-year time frame.

Naturally, the stock market soaring against the backdrop of a devastating economic crisis in the form of the coronavirus pandemic has created some worries about a crash as many investors believe the current environment is unsustainable.

While there are reasons to think that the stock market could be in a bubble, you still shouldn’t worry about a market crash. Here are 10 reasons why.

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Market crashes have happened before, but every time they do, stocks eventually recover. It may take a few years, but long-term investors always end up gaining money. Market crashes can be scary because stocks fall faster than they rise, but when they go up, they go up more than they fall. In other words, the recovery more than makes up for the crash.

If you’re worried about a market crash, this is a good time to revisit your financial goals. If your goal is to build wealth over a long period of time for something like retirement or paying for a kid’s college fund, there’s no reason to worry about a crash. If, on the other hand, you’re trying to get rich quick, you’re better off finding another way to do that as that’s a good way to lose money in the stock market.

ALSO READ: Worried About a Stock Market Crash? 5 Ways to Be Ready

The stock market isn’t risk-free. That’s a good thing, though. If there weren’t risk, there wouldn’t be as great of a reward. Stocks consistently outperform fixed-income options like bonds, and the riskiness, or volatility, of the market is inseparable from the reward. In fact, investors have put up with occasional market crashes in order to reap the benefits of the stock market, which include returning 9% annually through world wars, depressions, and other crises like the coronavirus pandemic.

Volatility is normal. It’s something every investor needs to learn to accept.

The coronavirus pandemic crash set a record for the fastest entry into a bear market as the S&P 500 fell 35% from its peak on Feb. 19 last year to March 23. In little more than a month, a third of the stock market’s value had been erased as the novel coronavirus sent countries around the world into lockdown, precipitating fears of a global economic crash.

But then something surprising happened. Congress stepped in to pass a $1.9 trillion rescue package with the CARES Act, and the Federal Reserve announced a new bond-buying program and other monetary policies to do what was necessary to maintain liquidity and confidence in the economic system.

Those policies worked, and the market quickly rebounded. By August of last year, it had recovered all of its losses, something few expected during the crash in March.

You’re never going to buy at the absolute bottom or sell at the absolute top, and deluding yourself into thinking so will only make you frustrated with your performance. The goal of investing isn’t to have the best performance possible but to build wealth over time and ideally outperform the market, though outperformance isn’t necessary for success.

Worrying about a market crash or obsessing over every movement in the market is an easy way to lose sleep, and it can negatively impact your mental health. The best investors in the world, like Warren Buffett, don’t check their portfolio every day. They make educated decisions and then stick with them until something changes their thesis.

ALSO READ: 7 Things You Need to Do Before the Next Stock Market Crash

One reason you might be worried about a market crash is because you need the money that’s invested. In this case, you may want to convert those holdings into cash. Most financial advisors recommend against investing any money you will need in the next few years, and most financial plans shift equity holdings to fixed income as your retirement date nears.

If you do need money that’s tied up in stocks, it may be best to liquidate those holdings rather than risk a crash. However, if you are able to invest for the long term, then there’s no need to worry about a crash as those investments will eventually recover even if one happens.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

True long-term investors perk up at a market pullback. That’s because the stocks they’ve had their eyes on are now on sale. Rather than looking at a market crash as a negative because their portfolios are down, these investors see market crashes as buying opportunities since stocks now trade at discounts.

By this logic, a market crash isn’t something you should fear but something you should look forward to so you can take advantage of it. If you’re investing for the long term, the best time to buy stocks is in a crash or a pullback.

Normally, market crashes accompany recessions. The stock market responds to a weakening economy by selling off as investors fear tough times ahead. This time around, the opposite appears to be the case as economic growth is likely to soar once the coronavirus pandemic has been brought under control and it’s safe to return to prepandemic activities like travel, live entertainment, and eating out at restaurants.

With those expectations comes some fears of rising interest rates, which are weighing on some stocks, especially after the market has gained so much over the last year, but a full-fledged crash in a strong economy would be unusual. It’s possible that high-priced growth stocks could see further deflation, however.

ALSO READ: 3 Stocks for a Reopening Spending Boom

Warren Buffett has famously said that he can’t time the market, and he doesn’t know anybody who can, either.

The alternative to accepting the occasional market crash is to try to time the market, selling stocks when you think they’re at their high and buying them when they’re at the low. The only problem is no one can do that on a consistent basis successfully, and you’ll be missing out on big gains if you sell too early. Similarly, it’s easy to think you can just buy stocks when the market bottoms in a crash, but you’ll never know it when it’s happening. Ultimately, it’s more of a risk to sell your winners too early than it is to absorb the losses in a crash. Therefore, you’re better off just holding onto your stocks through a sell-off.

It’s not uncommon for the stock market to fall 10%, defined as a correction, or 20%, considered a bear market. However, a market crash of 40% or more is very rare. In fact, that has only happened three times since World War II.

While that certainly doesn’t preclude it from happening, it doesn’t make sense to constantly worry about such a rare event. If a crash does happen, you can remind yourself that the market will recover and that it's a good opportunity to buy stocks on sale.

Every investor has a different level of risk tolerance, or the amount of risk you’re willing to take on to get more growth. Growth investors tend to be risk-seeking. They accept the fact that some of their investments will fizzle out in exchange for owning a stock that becomes a 10-bagger or 20-bagger.

But if every sell-off makes you jittery, then your risk tolerance is probably on the lower end of the spectrum, and growth investing isn’t for you. You’re better off owning defensive, recession-proof stocks like consumer staples, healthcare, or utilities that pay dividends and tend not to pull back much in the event of a market crash.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Market crashes are inevitable in the stock market, but that’s the price of admission to build wealth over the long term. Think about this way. Even if your performance just matches the S&P 500, that would mean doubling your money in eight years, quadrupling it in 16 years, and growing it by 13 times after 30 years, and that’s with market crashes included.

The lesson is, as always, stay invested. Selling during a market crash can cause you to lose more over the long run by missing out on the recovery, so it’s best to just accept the occasional crash, knowing that you’ll be rewarded over the long term.

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