If you’ve been following the news (and your own portfolio) lately, you’re probably wondering if all this volatility means we’re headed for a stock market crash. Although signs of an impending recession have begun to appear again, there is no clear evidence that we are in for a deep dive in this direction.
So far, markets in 2022 have not fallen to the level of the coronavirus crash in March 2020, when the stock market experienced its biggest drop in almost a decade, when the Dow fell nearly 2,000 points – the biggest drop since the European debt crisis in 2020 year. August 2011
While no one can predict when the market will fall (or how much), we all know that markets fall and fall. Sometimes they do it in a very dramatic way (especially when unexpected events occur, such as a global pandemic).
But a stock market crash is only bad news if you need money soon—and you should never buy stocks with money you need soon.
Why You Shouldn’t Worry
For most people who play the long game with their investments, a stock market crash should not be a problem. That’s why:
The S&P 500 has experienced significant falls over the past few years, none of which have caused lasting damage. However, the value of the S&P 500 has more than doubled over the years.
This is good news, and also bad.
The fact that the S&P 500 has performed so well over the past few years (despite the occasional scary spike) is a reminder that stocks are still a great long-term investment. But stocks won’t rise at this rate forever.
The question of how much a long-term investor in the stock market can earn in 30 or 40 years is the subject of much debate. Historically, a 10% (adjusted for inflation) average annual return over 30 years is not unusual. But don’t expect it to be like this forever. This article explains well why.
What to do after a stock market crash?
Nothing
For long-term investors, the best thing to do during a stock market crash is literally do nothing. Hold tight.
Take a breath, turn off the news, and – whatever you do – don’t log in to view your account balance.
Resist any urge to sell shares
Panic selling is the worst thing you can do after a stock market crash. Successful investing is about buying low and selling high. When you sell after a crash, you are doing just the opposite.
And if you think you can just cash out now and then come back when the market improves, consider this: you have no way of knowing when the market will bounce back. And there is a big price to pay for missing just a few really good days in the stock market.
For example:
- If you invested $10,000 in the S&P 500 between 2002 and 2021 and kept your money invested, you would earn $61,685, which is a 9.5% annual compound return.
- If you miss the top 10 days, you’ll end up with just $28,260, which is a 5.3% return.
- If you missed the top 20 days, you would have only $16,804, which is a 2.6% return.
These statistics are from JP Morgan Asset Management’s 2022 Retirement Guide.
Buy shares (if you were going anyway)
The best time to invest is when you have money to invest. The best time to sell an investment is when you need the money for something else.
However, if you wanted to invest but were dragging your feet for whatever reason, you might consider a stock market crash as a buying opportunity. No, you don’t know if the market will go up or keep going down. But you know this: stocks are about 10% cheaper than they were last week.
If you’re thinking about starting investing, check out our list of the best investment accounts for young investors.
Rebalance your portfolio after things calm down
Diversification is essential to successful investing. Although I am a fairly aggressive investor, bonds and real estate-related securities make up about 20% of my portfolio.
After a period of market volatility, the value of your investment may change so much that your actual asset allocation will shift away from your target value. There is no rush, but big moves in the stock market are a good reminder to check your portfolio and consider taking a few steps to bring your portfolio back into balance.
One resource I currently use for this is an Wealth. I opened an account with Wealth because of some specific things that I really liked, like the 529 college savings plan. I also love their Wealthfront money account which has something called Self-Driving Money™. Basically, you can automate any cash in your account so that it goes into different savings and investment accounts based on your pre-set savings goals. This makes saving and investing incredibly easy.
Read more: Wealthfront Review: My Experience with Wealthfront
Robo advisors can help manage your money when the stock market is on the move
For inexperienced investors, falls can be especially horrendous. But it’s not the end of the world either. When you’re young, you have years to make up for a stock market crash, so Generation Z and millennials should be the least of their worries.
That being said, it’s still easy to react badly when something so scary happens. This is where robots come to the rescue.
Advisor robots don’t respond out of fear, as we do. They use sophisticated algorithms to select the best stocks and bonds for you, which can be especially helpful (and gives you a lot of peace of mind) when the market is on the move and you are panicking.
Here is a list of our favorite advisor robots to get you started, but let me talk about some of my absolute favorites right now for this particular situation.
First, Improvement it is excellent. I know because I’ve invested in them and I have a hell of a lot of confidence in my ability to pick stocks individually. But I just love their platform.
It is a robo-advisor with many features (including a new cash account and automatic collection of tax losses) and, most importantly, without a minimum investment. Therefore, when the market is unstable, as it is now, you can start investing without a minimum.
Another robot I like right now is M1. They have a lot of flexibility if you want more control over your portfolio but still want the ease of use of a robo-advisor.
Check out my full M1 considerationbut TL; The DR is that they are affordable, very flexible and you can invest in fractional stocks.
Summary
Amid speculation that a looming recession could be on the horizon that could potentially affect your stock investment, you should remember that stocks are still effective long-term investments.
Unless you need cash immediately (in which case you probably shouldn’t have been in the stock market at all), don’t sell your stock after the crash. The best thing to do is sit back and be patient. If you have the money to invest, buying shares at a low price can be a smart long-term move during a recession. After things settle down, take the time to review your investments and make any adjustments to rebalance your asset allocation.
Additional report by Juan Ruiz.