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After a rocky few weeks, the stock market officially entered correction territory recently. A correction is defined as a drop by at least 10%, and the S&P 500 is down more than 12% since the beginning of the year.
Between the conflict in Ukraine, continued supply chain issues, surging inflation, and an ongoing pandemic, there are many factors that could contribute to stock market volatility. Some investors are also concerned that this correction could become a full-blown crash.
Is a stock market crash really on the horizon? And if so, what should you do with your investments? Here’s what you need to know.
Image source: Getty Images.
Will the market crash soon?
Although the world is a turbulent place right now, that doesn’t necessarily mean a stock market crash is looming.
The market is unpredictable, and it’s impossible to know exactly how it will perform in the short term. There are various factors that could suggest the market will experience more volatility, but whether it will actually happen is anyone’s guess.
Case in point: At the beginning of the COVID-19 pandemic, many experts predicted we’d not only experience a crash, but also that it could take months or years for the market to recover. While we did see a brief downturn, the market quickly recovered and went on to see two of its best years in history.
This isn’t to say that a crash definitively won’t happen. But it’s also impossible to say for certain that it will. That said, there are a few things you can do to prepare either way.
How to prepare for a potential crash
It’s a difficult time to be an investor right now. With the world on edge and the possibility of a crash looming, it may be tempting to stop investing or even pull your money out of the market altogether.
However, market downturns can actually be a smart investing opportunity — if you have the right strategy.
While they can be intimidating, market downturns are only temporary. The stock market itself has experienced dozens of corrections and crashes over the decades, and it’s recovered from even the most severe ones. If the market does crash again, it’s extremely likely it will bounce back eventually.
A downturn, then, can be a great chance to buy when stock prices are lower. Even the most expensive stocks sell for a discount when the market is down, giving you the opportunity to load up on quality investments for a fraction of the price. Then when the market inevitably rebounds, you’ll reap the rewards.
The key is to choose the right investments. While the market as a whole is likely to survive a crash, not all individual stocks will. By investing in strong stocks from healthy companies, it’s more likely your investments will survive any potential volatility.
One caveat, however, is to make sure you can afford to invest. Double-check that you have some savings set aside in an emergency fund, and only invest money you won’t need for the foreseeable future. If the market does crash, it may take months or even years to recover. Be sure you’re prepared to leave your money in the market for at least that long.
Nobody knows for certain whether the market will crash. However, that doesn’t mean you can’t prepare. By choosing quality investments, you can give your portfolio the best chance at surviving whatever may happen with the market.
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