Sure, a market crash can be unsettling, at a minimum. At a maximum, it can have you hyperventilating and preparing to sell all your holdings. That’s generally not advisable, though.
Here are three reasons why you shouldn’t worry about a stock market correction or crash. (Note that a correction is generally an overall decline of between 10% and 20%, while a crash is one of 20% or more.)
1. Corrections and crashes happen fairly frequently
Stock market declines are inevitable. Research from Schwab shows an intrayear decline of at least 10% happening in 11 of the 20 years from 2000 to 2019 –roughly every other year, on average. Bigger declines happen, too, but less frequently.
Stock market declines are also unavoidable, unless you plan to sit on the sidelines to miss them, in which case you’ll likely miss bull markets, too. After all, no one knows exactly when the market will crash and when it will rebound. One study that looked at the market’s performance over a recent 20-year period found that if you happened to be out of the market during its 10 best days (out of 7,300 days, mind you), your overall returns would drop by more than half. Yikes.
It’s simply hard to avoid market declines; they happen a lot. If you let them worry you, you’ll be worried all the time.
2. They can be welcome events, delivering bargains
Another reason not to worry about a stock market crash is because it can create great bargains. Some of the most successful investors have made some of their best investments right after a market crash because lots of great companies’ stocks are suddenly trading at much lower prices. If you’re worried about any particular companies you own stock in or would like to own stock in, it’s helpful during or after a crash to take a deep breath and ask yourself: Has anything changed for the worse regarding this company’s future? Most likely, the answer will be no — the stock has simply fallen along with the rest of the market. The business remains intact and operating as well as before.
If you can keep some cash on hand, you might even be able to make the most of a stock market crash by snapping up shares you’ve been wanting to own. Think back to 2008, for example, when the stock market plunged. Shares of Microsoft fell more than 30%, but since the end of 2008 they have risen more than 1,400%.
3. Recoveries are often quick
A final reason not to panic over market corrections and crashes is that they tend to be over relatively quickly. As the Schwab report noted, “Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 24% one year later.” So if you’re planning on buying into certain stocks after a crash, don’t procrastinate.
It’s worth noting, though, that despite their average rates of occurrence, both downturns and recoveries are quite irregular. You might have a year with two significant downturns and a string of five years with mostly gains. One downturn might reverse course in a month, and another could possibly 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, if not more, years.
Once you know what to expect from the stock market, you should feel less surprised — and less panicky, too — when it heads south for a while. Selling out in a panic is generally one of the worst things you can do as it means you’ll realize far less in gains and perhaps even end up having lost money.
Expect downturns, and expect to ride them out.
