There was a time in my life when the words "stock market crash" would be enough to send me into a full-fledged panic. To be clear, that was when I was brand new to investing and knew a lot less than I know now.
These days, when stock market crash warnings abound, I see opportunity. Namely, I make plans to scoop up quality stocks on the cheap so I can grow my portfolio more affordably.
But it's not just experience that's caused me to change my tune with regard to market downturns. Here are a few specific reasons why crashes don't worry me.
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1. I'm not planning to touch my investments for years
I have money invested in a couple of different accounts -- a retirement plan and a traditional brokerage account. I can't touch my retirement savings without penalty until I'm 59 1/2, and while my brokerage account isn't restricted -- I can cash out investments whenever I want and take the money to use as I please -- I still have no plans to tap it for many years.
By not relying on my investments for near-term income, I've effectively set myself up to care less when the stock market takes a tumble. Sure, it can be disconcerting to see my portfolio value plummet, but the knowledge that it's only temporary and that I have plenty of years to ride out the storm is enough to keep me calm.
2. I have ample emergency savings
Some people lose money during stock market crashes because they're forced to sell investments at a loss when a need for money arises. It's for this reason that I've made a point to put together a solid emergency fund -- one with enough money to cover around a year of living expenses.
To be clear, my approach to emergency savings is a bit aggressive. For many people, a six-month supply of living expenses in the bank will more than suffice, but since my income is variable and I get no coverage for time off as a self-employed worker, a year's worth of bills aligns better with my comfort level.
The money I have stashed away in a savings account is earning practically no interest these days because rates are abysmal, and that's frustrating. But having that amount of savings allows me to leave my brokerage account alone during downturns, thereby helping me preserve wealth by avoiding losses.
3. I know stock market downturns are normal
I used to think stock market declines were pretty uncommon until I did some research, at which point I realized they actually happen all the time. Sometimes, they come in the form of corrections, where stock values fall 10% from a recent high. Other times, they can be full-fledged bear markets, where stock values decline at least 20%.
Bear markets can be scarier than corrections because they're more extreme, but they also tend to happen pretty often, which is actually a comforting thing to me. In fact, the S&P 500 has been through 26 bear markets since 1928, and ultimately, it's recovered from all of them. In fact, there have also been 27 bull markets since 1928, which makes the case that stocks have a strong history of doing well in the long run.
Stock market crashes can be scary, but they don't have to be. If you take a long-term approach to investing, protect yourself with emergency savings, and read up on the stock market's history, you're apt to find that the next downturn is a lot less nerve-wracking for you.
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March 13, 2021 at 06:02PM
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I Used to Worry About Stock Market Crashes. Here's Why I Don't Anymore - Motley Fool
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