The stock market has been on a wild ride over the past year and a half. After losing more than one-third of its value in a matter of weeks during the early stages of the COVID-19 pandemic, the S&P 500 is up nearly 100% since last March.
Some people believe all this growth is too good to be true, though, and that the market is overvalued. That means a market correction could be on the horizon to bring prices back down.
The truth is that nobody can predict exactly when a downturn will occur, how severe it will be, or how long it will last. That said, if you're concerned about an upcoming market crash, there are a few things to keep in mind.
1. Stock market downturns are relatively common
Market downturns can be alarming, but they happen more frequently than you might think. In technical terms, a “correction” refers to any time the market falls by 10% to 20%. A “crash” is a sudden drop by more than 20%, and we're in bear market territory when the market falls by more than 20% and doesn't recover right away.
Since 1928, the S&P 500 — one of the major benchmarks of stock market performance — has experienced more than 50 downturns in which the market fell by 10% or more, according to data from consulting firm Yardeni Research. Of those downturns, 21 could be classified as crashes or bear markets.
The stock market is cyclical, and market downturns can actually be healthy. Stock prices can't keep climbing forever, so regular dips are normal and happen quite frequently.
2. The market has a long history of recovering from falls
It may not be too reassuring to know that market crashes can happen regularly, but the good news is that it's also very likely the market will recover. Of all the crashes and corrections the market has experienced over the years, there has never been a single instance in which it didn't bounce back eventually.
That's quite the feat, considering the market has been through the wringer in the past. When the dot-com bubble burst in the early 2000s, for example, the S&P 500 fell by nearly 50%. During the Great Recession, the market lost more than 56% of its value between 2007 and 2009.
Yet despite those significant downturns, the S&P 500 is still up by more than 200% since 2000.
In other words, even if the market does experience a correction or even a crash sometime this year, you can rest easily knowing there's a very good chance things will get better.
3. By investing for the long term, you can keep your money safe
One of the most intimidating aspects of market crashes is that nobody knows for certain when they will happen. The worst crashes are often triggered by factors outside our control — like a housing market crisis or a global pandemic — and it's easy to feel helpless when stock prices start falling.
The one thing you can do to protect your money, however, is to invest for the long term. Long-term investing involves buying strong stocks and holding them for years or even decades, regardless of what the market does.
Strong, healthy companies are more likely to survive market volatility. By filling your portfolio with solid stocks, your investments have a much better chance of bouncing back if the market does experience a downturn.
Nobody knows for sure whether a market downturn is on the horizon, but you can prepare for it by building a solid investment portfolio and choosing the right stocks. Whether the market crashes or not, you'll be prepared for anything.
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