The stock market is one endless rollercoaster of ups and downs, and there's always a chance that another downturn is around the corner.
Despite the phenomenal returns the stock market has earned over the past year, it can't keep climbing forever. Sooner or later, the market is bound to crash.
Nobody knows when, exactly, that will happen, but market downturns are inevitable. Here's what to do if it happens soon.
1. Stay calm
Market crashes can be unnerving for even the most seasoned investors, and it's normal to worry about your investments. But making major decisions when you're feeling panicked rarely turns out well, so the best thing you can do when stock prices plummet is to remain calm.
That's easier said than done, of course, but remind yourself that market downturns are normal. Since 1928, there have been 21 separate instances when the S&P 500 fell by at least 20%, according to data from consulting firm Yardeni Research. And in every single one of those instances, the market was able to recover.
No matter how bad things may seem in the moment, remember that it will get better. Stay calm, focus on the future, and try your best not to make any impulsive decisions.
2. Avoid pulling your money out of the market
One of the worst moves you can make during a downturn is to pull your money out of the stock market. Not only does this limit the potential of your investments, but it can cost you more than you may think.
When the market plummets, stock prices fall. That means your investments are less valuable than they are when the market is thriving and prices are higher.
If you purchase your stocks when prices were high and then sell them when prices are lower, you may end up selling your investments for less than you paid for them. Then if you decide to reinvest after the market bounces back, you're buying, once again, when prices are high.
It can be tempting to panic-sell your stocks when the market is volatile, but that could be a costly mistake. Instead, try to avoid touching your investments at all. By leaving your money alone, you can simply ride out the storm. When the market recovers, your investments should bounce back, as well.
3. Consider investing more
The silver lining to market crashes is that stocks are essentially on clearance. Stock prices are lower than usual, and you have the perfect opportunity to load up on quality investments for a fraction of the cost.
The key here is to stick to strong investments and avoid buying shaky stocks just because they're on sale. Bad investments are bad investments, regardless of how much they cost, and you may end up regretting them later.
To make sure you're buying only the best stocks, make a list of investments you're interested in before the market crashes. This way, you have plenty of time to research stocks and make sure you're making good investing decisions when prices fall.
Finally, only invest if you can afford to do so. If you don't have an emergency fund or are having a tough time paying bills, those should be your first priorities. Only consider investing once your financial situation is in good shape.
Stock market downturns can be intimidating, but even the worst crashes will eventually pass. By making sure you're as prepared as possible, you can rest easier, no matter what the market does.
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