Of course, a stock market crash can be at the very least unsettling. At maximum, this can hyperventilate you and prepare you to sell all of your holdings. This is generally not advised, however.
Here are three reasons why you shouldn’t worry about a stock market correction or crash. (Note that a fix is ââusually an overall drop of between 10% and 20%, while a crash is a drop of 20% or more.)
1. Fixes and crashes happen quite frequently
Stock market declines are inevitable. Schwab’s research shows an intra-year decline of at least 10% in 11 of the 20 years from 2000 to 2019 – roughly every two years, on average. Larger declines also occur, but less frequently.
Stock market declines are also inevitable, unless you plan to sit on the sidelines to miss them, in which case you will likely miss the bull markets as well. After all, no one knows exactly when the market will crash and when it will rebound. A study that looked at market performance over a recent 20-year period found that if you were off the market for its best 10 days (out of 7,300 days, mind you), your overall returns would drop by more than half. . Ouch.
It is simply difficult to avoid market downturns; they happen a lot. If you let them worry you, you’ll be worried all the time.
2. They can be welcome events, offering great deals
Another reason not to worry about a stock market crash is that it can create good business. Some of the more successful investors have made some of their best investments right after a stock market crash, as many stocks of large companies are suddenly trading at much lower prices. If you are worried about specific companies that you own shares in or would like to own, it helps during or after a crash to take a deep breath and ask yourself: has anything changed about the business? worse as regards the future of this company? Most likely, the answer will be no – the stock has simply fallen along with the rest of the market. The business remains intact and operates as well as before.
If you can keep cash on hand, you might even be able to make the most of a stock market crash by acquiring the stocks you wanted to own. Think of 2008, for example, when the stock market plunged. Actions of Microsoft have fallen by more than 30%, but since the end of 2008 they have increased by more than 1,400%.
3. Recoveries are often quick
One final reason not to panic about market corrections and crashes is that they tend to end relatively quickly. As the Schwab Report notes, “Since 1974, the S&P 500 has risen on average more than 8% a month after a market correction low and more than 24% a year later.” So, if you are planning to buy some stocks after a crash, don’t delay.
It should be noted, however, that despite their average occurrence rates, slowdowns and recoveries are quite spotty. You could have a year with two big drops and a chain of five with mostly gains. One downturn could change course in a month, and another could last for several years. For these reasons, it’s best to only invest money in stocks that you won’t need for at least five years, if not longer.
Once you know what to expect from the stock market, you should feel less surprised – and less panicked, too – when it heads south for a while. Selling in a panic is usually one of the worst things you can do, as it means you’ll make a lot less money and maybe even end up losing money.
Expect slowdowns and expect to overcome them.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.