Investing anxiety keeping you up at night? When stock prices turn rocky, even the hardiest of investors can lose sleep over the possibility of a big market crash. The thing is, worrying about a crash is the wrong way to use your brainpower and emotional energy. Here are four reasons why.
1. Crashes happen
Every so often, the market crashes. That's something all stock market investors must accept.
Rather than worry about what you can't change, look for the opportunity in a market crash. Great companies can navigate down markets — that's part of what makes them great. If you're willing and able to wait for a recovery, look to a crash as your chance to buy great stocks at a discount.
2. Worrying affects decision-making
Worrying can push you into investing decisions you'll later regret. You might, for example, move into cash or sell off your growth stocks in anticipation of a crash. If the crash doesn't materialize, you'll have to buy your stocks back at some point — probably at higher prices.
Even if the crash does happen as you expect, you don't want to stay out of stocks forever. But timing your reinvestment can be more imprecise than predicting a crash. Recovery gains can be extreme and surprising. The biggest gains can happen during bear markets, or at least before most investors realize a recovery is underway.
If you can quiet the internal worry voice that tells you to sell, you don't have to make those timing decisions.
3. The market will recover afterwards
Since the 1920s, investors have felt the sting of a Great Depression, turbulence in oil prices and cryptocurrency, overvalued technology stocks, terrorist attacks, a Great Recession in 2008, and a global pandemic. After every crisis, the market recovered and returned to growth.
The timing of those recoveries has varied, of course. You might wait months or years for your portfolio to eclipse its previous highpoint. But the recovery will happen. If you don't have faith in that, bear markets will be hard for you to stomach.
4. Average returns include crashes
The average annual growth rate of the stock market is about 7% after inflation. That 7% is more than 10 times what you'd earn on a cash deposit in a high-rate savings account. It's also an appropriate growth rate to use when projecting how your portfolio's value will increase over time.
Even better, that 7% average includes the market's best and worst time frames. You can take that to mean that you can earn 7% average annual growth even after absorbing down years like 2008, when the S&P 500 dropped more than 38%, or 2002, when it dropped 22%.
According to history, if you wait long enough, the growth markets will more than offset those terrible down markets. Sure, you may not average exactly 7% over time. But staying invested is the most reliable way to push your average returns higher after a crash.
Do this instead of worrying
There are two productive steps you can take in lieu of worrying about the stock market. One, check your cash reserves and your upcoming cash needs. You don't want to tap into your portfolio when share prices are down. Ample cash on hand protects you from that scenario.
Two, consider how much risk you can handle. At the right risk level, you are happy with your returns and you are comfortable staying invested consistently through all market cycles.
If your risk level today feels too high, adjust. That might mean holding more blue chip stocks or long-term dividend payers. It does not mean moving into cash — because you won't like those returns.
Keep a long-term focus
A stock market may be just around the corner, or it may not be. Worrying doesn't change the future or help you prepare for it.
When your internal worry voice gets loud, shift your focus. Think about the opportunities that could arise from a crash. Research stocks you might want to buy at lower prices.
Also, reflect on the resilience of the stock market. Crashes and corrections happen. And, just as certainly, those down cycles eventually give way to growth.
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