Investing in the stock market can be intimidating, especially in times of volatility. While market turmoil is normal, it doesn’t necessarily make it easier to invest your savings.
Over the past year and a half, the stock market has seen phenomenal returns. Indeed, since the market bottomed out in March 2020, the S&P 500 is up almost 100%. However, some experts believe that all this growth has resulted in an overvaluation of the market and that a correction may be required soon.
If the market experiences a downturn, what does this mean for your strategy? Is it still safe to invest at this time? Or should we wait? Here’s what you need to know.
Will the market collapse soon?
First of all, it’s important to understand the difference between a fix and a crash. A market correction occurs when a major stock index (like the S&P 500 or the Dow Jones Industrial Average) drops 10-20%, while a crash is generally defined as a drop of more than 20%.
Corrections are more common than accidents, but they can still be intimidating because no one knows how bad they can get. Once the market has fallen by at least 10% and entered the correction zone, it could rebound quickly or continue to fall enough to be considered a crash. If the market falls more than 20% and does not recover quickly, then we are officially in a bear market.
Corrections and market crashes are sometimes triggered by situations beyond our control (like a global pandemic), and sometimes they happen when investors think stock prices have become too high and are overvalued. The only thing we are sure of is that they can be unpredictable, and no one knows exactly when they will happen.
This uncertainty can be alarming, and it is tempting to avoid investing in the stock market as a correction or crash looms on the horizon. But if you don’t invest now, you could miss out on more than you think.
Why continue to invest when the market is volatile?
When the stock market is volatile – or could become volatile in the future – the last thing you might want to do is invest more money. However, there are several reasons why continuing to invest (even during times of volatility) can be a smart move.
On the one hand, market declines are a fantastic opportunity to buy great stocks at lower prices. When the market is booming, stock prices are at their highest. This is not a bad thing, but it can be time consuming to invest. When the market goes down, stocks are essentially selling – and now is a great time to stock up on solid investments at bargain prices.
Of course, not all stocks are great investments, so be sure to do your homework before buying. The best stocks come from healthy companies that have a good chance of surviving market turbulence. By investing when prices are lower during a downturn, you will reap the rewards later once the market rallies and stock prices rise again.
Investing for the long term is also one of the best ways to make money on the stock market. If you stop investing or even take your money out of the market every time the prices fall, you are missing out on valuable time to grow your money.
The stock market can be intimidating, especially when it’s volatile. However, it is safer than it looks, and investing is still one of the easiest and most effective ways to build wealth over time. By choosing the right stocks, you will be able to weather any storm and help your money reach its full potential.