4 reasons not to worry about a stock market crash
Is the market going to collapse or not? This is a question many investors are asking now as the market is hinting that it may not be as resilient as it has been since March of last year.
The S&P 500 (SNPINDEX: ^ GSPC) is only down a little over 2% from its early September highs, but things are different about this lull. Not only is it generally a tough time for the market, but a few indices (and some individual stocks) are starting to trade below key levels that technical analysts have been watching for some time. When these lines in the sand are crossed, they don’t change long-term fundamentals, but these events can certainly signal – and even trigger – massive sales.
The thing is, even if a major correction is in the cards, don’t beat yourself up. Here are four specific reasons why you don’t need to panic.
1. Corrections and bear markets do occur, but they have never been permanent in the United States.
Just since the rebound of the subprime mortgage collapse in 2008 and the bear market that followed, the S&P 500 has fallen at least 10% (up and down) on 11 occasions. The index has also fallen more than 20% from peak to trough on two occasions during this time period – bear markets in their own right by the most common definition of what constitutes one. This is more or less the same pace and rate of corrections that the market experienced prior to 2008, going back almost 100 years to the crash of 1929.
How many of those steep drops that ultimately weren’t wiped out by rebounds to the pre-crash peaks and beyond? Zero. Nada. Nothing. Some of the Wall Street dives took longer to relax than others, but so far each has ultimately been followed by a rise to new records.
For better or worse, corrections are the market’s way of reassessing what investors are willing to pay for stocks relative to their risk. However, the underlying drivers of economic growth have never really gone away, and the ability to benefit from that growth is ultimately what equity investments are meant to offer investors.
2. Accidents are impossible to predict with precision anyway.
There is a famous quote from economist Paul Samuelson: âThe stock market has predicted nine of the last five recessions.
This joke has since become an overused clichÃ©, but it’s still instructive. Investors tend to anticipate a lot of negative situations that never happen, thereby missing out on opportunities.
That’s not to say that crashes and recessions don’t happen. The point is, however, that we never really know the true state of the economy at some point until well after the fact when the indicative data is released, at that point it doesn’t really help anymore. to make investment decisions. Guessing about economic conditions and short-term directions is a game that is best not to play. Staying invested in stocks even when things look scary is statistically the best bet.
3. Stress prompts you to make bad decisions
Not only is it difficult to predict withdrawals with any degree of accuracy, the stress associated with trying to perfectly time your entries and exits in stocks can lead you to make some unwise decisions.
There is a scientific explanation for why this is so. A 2017 study by researchers at MIT determined that chronic stress explicitly drives people to make higher-risk decisions, by overactivating neurons in your median prefrontal cortex. This effectively blurs the mental lines that separate good choices from bad choices.
In a similar but simpler vein, consider the fight-or-flight dichotomy we all face when placed in speed-sensitive, stressful, life-and-death (and financial) situations.
Your brain is actually doing something pretty smart in these cases (from an evolutionary standpoint), mainly to give your body its best chance for survival. Namely, it limits your focus on your two best available options given the circumstances. One of them flees the safest route, and the other fights your threat head-on in a way that lets you see all you can about danger. Your brain deliberately doesn’t come up with more nuanced alternatives when you’re feeling pressured, because simplicity translates into vital decision-making speed. For investors, however, it’s often one of the nuanced, middle-of-the-road options – like selling a few of your stocks – that would be the better choice.
So take a breath, take a step back, and remember that choosing to do nothing at all is a viable choice. Just make that decision ahead of time and tell yourself to stick to it even when the market plunges.
4. Corrections Buy Opportunities
Finally, investors should keep in mind that pullbacks are buying opportunities for stocks that were previously too expensive.
Hanging on to this idea is easier said than done. Jumping into new stocks as they fall is pretty much the same as trying to catch a falling knife … dangerous (not to say stressful). Just keep Reason # 1 in mind. Historically, US stock corrections have ended up stopping and reversing. Most of them stopped and reversed sooner rather than later.
And if you’re still struggling to think of big drops as buying opportunities, here’s one final tip that should help: Make your shopping list ahead of time. Pick the stocks you want to buy and the highest prices you’re willing to pay before any market-wide correction. That way, once things start to fall apart, you will have a plan in place that was worked out before you were swayed by the emotions that swell when the market collapses. This is half the battle.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.