The stock market has been rocky lately (see our latest market #intelliGENce), and that volatility can be concerning.
Coupled with the economic uncertainty we're facing right now (including surging inflation and additional interest rate hikes this year), some investors worry a crash is looming.
To be clear, it's impossible to say for sure whether a market crash is coming or not, and no “expert” can't reliably predict exactly how the market will perform in the short term. However while nobody knows for sure what's in store for the markets, there are a couple of reasons you shouldn't worry about a potential crash, even if one does come.
The most important thing to remember during times like these, though, is that the market as a whole has a very long history of recovering from downturns. In fact, since 1928, the S&P 500 has fallen by more than 20% on 21 separate occasions.
And every time, it eventually bounced back.
The market downturn at the start of Covid is another perfect recent example.
Markets started falling two years ago during February 2020. Some fell over 30% in less than a month. Fast forward two years and all markets are now higher than they were prior to the Covid slump.
The best investing strategy, in theory, would be to pull your money out of the market right before prices fall, then reinvest when they're at rock bottom. This perfect marketing timing tactic is impossible to pull off reliably and successfully. Markets are unpredictable. No one can say exactly when it will crash or when prices will bottom out. ( If people really knew, there would be no market crashes.)
In many cases, the market will dip only to rebound a day or two later. If you sell and prices quickly recover, you'll miss out on those potential gains. Similarly, if you wait too long to sell and prices have already fallen substantially, you may end up selling at a loss.
This is because market returns are not linear and sometimes a lot of the returns happen in only a few outstanding days.
There’s a regularly trotted out article from investment providers titled something along the lines of "Time In The Market Beats Timing The Market". In fact, here’s exactly that after a quick search from UK investment house, Schroders!
This states that over the last 35 years an original £1,000 investment in the FTSE 250 could have made:
11.4% per year if you stayed invested the whole time
9.5% per year if you missed the 10 best days
8.1% per year if you missed the 20 best days
7% per year if you missed the 30 best days
The compounding difference over the long term is substantial. A safer strategy then, is to hold your investments regardless of what the market is doing.
If prices drop, try your best to wait it out until they eventually recover.
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