The stock market is known for its volatility, and that can be intimidating — especially if you have your life savings tied up in your investments. While the S&P 500 has experienced a phenomenal year since the market bottomed out last spring, stock market crashes are inevitable. This upward trajectory can't last forever, and some experts believe another crash is right around the corner.
If a market downturn is looming, what should you do with your investments? Is it better to pull your money out of the market right now? Here's what you need to know.
Timing the market is tough
On the surface, the best way to handle a market crash is to pull your money out of the market just before prices plummet, then reinvest when prices are at their lowest. This is called timing the market, and while it may seem like a smart strategy, it's harder than it looks.
The stock market is unpredictable, and even the experts don't know exactly when the market will crash or how long it will take to recover. Case in point: In the early stages of the COVID-19 pandemic, the S&P 500 lost roughly one-third of its value in a matter of weeks. While the crash itself was unprecedented, even more surprising was its almost instant recovery and continuous growth throughout the pandemic.
Nobody can predict when the market will crash, and if you sell your investments at the wrong time, it could be a costly mistake. If stock prices continue to rise after you sell, you'll miss out on that growth. Or if you wait too long to sell, you may end up selling your investments for less than you paid for them, locking in your losses.
What should you do to protect your money?
While it may seem counterintuitive, one of the best ways to protect your money from stock market crashes is to do nothing. By simply holding your investments, you can ride out the storm and let your money recover on its own.
The key is to make sure you're putting your money behind solid investments. It doesn't matter whether you're investing in individual stocks, mutual funds, or ETFs — if the investments have strong fundamentals and a healthy track record, they're more likely to survive market crashes.
This doesn't mean your investments won't experience volatility. If the market plummets, your investments will likely see their prices fall, as well. But solid investments are more likely to recover once the market stabilizes again.
Keep in mind, too, that you technically don't lose any money on your investments until you sell. So even if your portfolio loses value during a market crash, as long as you hold your investments until the market recovers, you won't lose any money. Pulling your money out of the market, however, could result in losses.
When it comes to market crashes, the good news is that they're normal and temporary. The market has experienced dozens of downturns and corrections over the years, and it's always managed to recover. By staying invested for the long haul, there's a very good chance your investments will bounce back, as well.
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