5 reasons not to worry about a stock market crash

Sstock market crashes do happen – sometimes they are minor, and sometimes they are major. If you want to build significant wealth by investing in the stock market – and there are few better ways to do it – you have to accept that market downturns are inevitable.

But here’s the good news: you can coexist with them. You can get richer or richer despite them. You just need to have some information under your belt. Here are five reasons not to worry about a stock market crash.

Image source: Getty Images.

1. You are a long-term investor

For starters, if you’ve spent a lot of time around The Motley Fool, you’ve probably heard us urging investors to keep all short-term money out of the stock market. Only invest money that you won’t need for at least five years (and maybe 10, to be on the safe side). This is because market downturns happen, and you don’t want a downturn to happen right before you go to sell in order to have money for a down payment or tuition.

So, assuming you are a long-term investor, you shouldn’t need to sell any securities anytime soon, so a stock market crash shouldn’t be of concern to you.

2. The next crash might not be around the corner

Next, don’t spend too much time worrying about a market correction or crash, as it might not happen anytime soon. Check out the table below of annual returns for the S&P 500 Index of approximately 500 of the largest U.S. companies:

Year

Return of the S&P 500

2008

(37%)

2009

26.5%

2010

15.1%

2011

2.1%

2012

16%

2013

32.4%

2014

13.7%

2015

1.4%

2016

12%

2017

21.8%

2018

(4.4%)

Source: Slickcharts.com.

Imagine we are at the end of 2008 and your portfolio is suffering one of the biggest losses in a single year the S&P 500 has ever seen. You can expect the market to recover in 2009, but you probably wouldn’t have expected a gain of more than 26%! Then 2010 was also a year on the rise, and 2011 again posted a gain, albeit a modest one. It might be reasonable to expect a drop next year, right?

But no, the S&P 500 jumped 16% in 2012, then climbed 32.4% the following year. Surely a lot of people were worried about a stock market crash by then – there had been five years in a row with gains. Well, the S&P 500 posted four more years of gains and then a modest loss.

The lesson is that, however, on average, market corrections (declines of at least 10%) happen about every two years, they can happen when you least expect them, and it’s hard to guess when they will happen.

A person is at a desk with a laptop, smiling for the camera.

Image source: Getty Images.

3. Crashes are followed by recoveries

It may be obvious, but remember that every market crash or correction has been followed by a recovery. Some bear markets can last for several years, but most corrections have not resulted in prolonged corrections.

According to a research report by Schwab, “Since 1974, the S&P 500 has risen on average more than 8% one month after a corrective market trough and more than 24% a year later.”

4. Crashes are great deals

The most wonderful thing about market corrections and crashes is that they produce great deals. Most of the stocks that you would like to own at the right price can suddenly be at the right price.

Warren Buffett better explained why we long-term investors should in fact be happy on the crashes in his 1997 letter to shareholders:

A little quiz: If you’ve been planning on eating burgers your whole life and you’re not a cattle rancher, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car every now and then but are not a car maker, should you prefer higher or lower car prices? These questions, of course, answer for themselves.

But now for the final review: if you expect to be a net saver over the next five years, should you expect a higher or lower stock market during that time? Many investors are wrong. Even though they will be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. Indeed, they are rejoicing because the prices of the “hamburgers” that they will soon buy have increased. This reaction makes no sense. Only those who will sell stocks in the near future should be happy to see stocks rise. Prospective buyers should much prefer descending prices.

5. Paper waste doesn’t hurt

Finally, one last reason not to worry about stock market crashes is that losses on paper don’t hurt. If your stocks that were once worth $ 100 each are suddenly worth only $ 75, you haven’t lost any money if you haven’t sold the stocks. You have what’s called a “paper loss” – it’s just a paper loss, not in reality. Long-term investors are likely to aim to hold their stocks for a long time, so as long as they don’t sell, they won’t realize a loss.

So don’t get more gray hair worrying about the next stock market crash. It certainly happens, but it might not happen until 2022, or it could happen tomorrow. And after that, there will be, eventually, a recovery. And in between, there are some great buying opportunities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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About Mary Moser

Mary Moser

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