Investing in the stock market can be intimidating, especially during periods of volatility. While market turbulence is normal, that doesn't necessarily make it easier to invest your savings.
Over the past year and a half, the stock market has seen phenomenal returns. In fact, since the market bottomed out in March 2020, the S&P 500 is up by nearly 100%. However, some experts believe all that growth has resulted in the market being overvalued, and it may be due for a correction soon.
If the market does experience a downturn, what does that mean for your strategy? Is it still safe to invest right now? Or should you hold off? Here's what you need to know.
Will the market crash soon?
First, it's important to understand the difference between a correction and a crash. A stock market correction happens when a major market index (like the S&P 500 or Dow Jones Industrial Average) falls by 10% to 20%, while a crash is typically defined as a fall of more than 20%.
Corrections are more common than crashes, but they can still be intimidating because nobody knows how severe they may become. Once the market has dropped by at least 10% and entered correction territory, it could rebound quickly or it might continue falling enough to be considered a crash. If the market drops by more than 20% and doesn't recover quickly, then we're officially in a bear market.
Market corrections and crashes are sometimes triggered by situations beyond our control (such as a global pandemic), and sometimes they happen when investors believe stock prices have gotten too high and are overvalued. The only thing we know for sure is that they can be unpredictable, and nobody knows exactly when they'll happen.
That uncertainty can be alarming, and it's tempting to avoid investing in the stock market when a correction or crash might be on the horizon. But if you don't invest now, you could be missing out on more than you think.
Why continue investing when the market is volatile?
When the stock market is rocky — or could become rocky in the future — the last thing you may want to do is invest more money. However, there are a couple of reasons why continuing to invest (even during periods of volatility) can be a smart move.
For one, market downturns are a fantastic opportunity to buy great stocks at lower prices. When the market is booming, stock prices are at their highest. This isn't a bad thing, but it can be an expensive time to invest. When the market falls, stocks are essentially on sale — and it's the perfect time to load up on solid investments at bargain prices.
Of course, not all stocks are great investments, so be sure to do your homework before you buy. The best stocks are from healthy companies that have a good chance of surviving market turbulence. By investing when prices are lower during a downturn, you'll reap the rewards later once the market recovers and stock prices increase once again.
Investing for the long term is also one of the best ways to make money in the stock market. If you stop investing or even pull your money out of the market every time prices fall, you're missing out on valuable time to let your money grow.
The stock market can be daunting, especially when it's volatile. It's safer than it may seem, however, and investing remains one of the easiest and most effective ways to build wealth over time. By choosing the right stocks, you'll be able to ride out any storms and help your money reach its full potential.
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