Will there be another stock market crash in 2020? A jury of financial analysts and psychics would be deadlocked trying to answer that question. The U.S. economy is still struggling with high unemployment and weak consumer spending, but the stock market continues to march toward a full reversal of the losses suffered in the spring.
Or, you might worry that the market outlook is too optimistic — which means a correction could be just around the corner.
You don’t have to stay up all night pondering which stance feels right to you, though.
The possibility of another 2020 stock market crash, while an interesting and debatable topic, doesn’t need to be a source of constant anxiety.
Here are three reasons why.
1. Stock market crashes are a necessary evil
Since 1929, there have been five major stock market crashes. They happen and they’re unpredictable. The only reliable way to avoid being affected by a crash is to stay out of the stock market entirely. That usually means you’d accept dismal cash interest rates of about 1% before inflation. Inflation is usually about 2% to 3%, though it’s currently lower at 0.6% — but even today’s low inflation eats up more than half of your cash returns. Based on those numbers, you could save $500 monthly for 20 years and end up with about $125,000 in spending power. As far as wealth-building goes, that’s pretty slow going.
On the other hand, the stock market’s long-term average annual growth rate is 7% after inflation. At that growth rate, your $500 monthly contribution will grow to $262,000 after 20 years. Of course, you won’t see an even 7% in earnings each year; it might be 20% one year and negative 4% the next. You have to accept those ups and downs along the way to get that higher rate of return over time.
2. Stock market crashes are temporary
The behavior of the stock market thus far in 2020 emphasizes this point: Crashes are temporary. Sometimes the market recovers with lightning speed, as it has in 2020. Other times, the reversal of a crash takes years. After the 2008 financial crisis came to a head, the S&P 500 index didn’t return to the highs it achieved in 2007 until early 2013 — four years after the market bottomed in 2009.
Because the timing of a recovery is unpredictable, you should remain disciplined about only investing money you won’t need to use for five years. Admittedly, that’s tricky when you’re saving for retirement and you plan on leaving the workforce soon. The good news is that you only need a slice of your retirement funds to be available on the day you resign. You can accommodate that by keeping a portion of your retirement portfolio invested stable-value or fixed income funds or cash equivalents. You might also increase the size of your cash emergency fund to give yourself even more flexibility.
3. Stock market crashes create opportunity
A market crash does reduce the value of your portfolio, but it also presents some incredible buying opportunities. As legendary investor Warren Buffett has famously said: “The best chance to deploy capital is when things are going down.” Even if you’re not a stock picker, you could take advantage of lower-than-normal prices to buy up your favorite mutual funds and index funds.
To be clear, buying after a crash isn’t for the faint of heart or anyone with a short investment timeline. But if you’re bold enough to buy when everyone else is selling and patient enough to wait for the eventual recovery, you stand to profit nicely.
This, too, shall pass
Let the analysts and psychics argue for or against an impending market crash. Your job is to remain clear-headed through these uncertain times. You will survive financially, as long as you can afford to ride out the volatility. If you feel the need to do something to prepare for a crash, confirm that you’re comfortable with the risk in your portfolio and that you have the liquidity you’ll need for the next few years.
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Source: The Motley Fool