Is a Stock Market Crash Coming? Before You Invest, Make This 1 Critical Move.
Stock prices have been plunging in recent days. The S&P 500 (^GSPC -1.78%), Nasdaq Composite (^IXIC -2.61%), and Dow Jones Industrial Average (^DJI -0.99%) have fallen by 3.92%, 4.44%, and 3.15%, respectively, since Monday, as of this writing.
Many Americans are rattled by the Trump administration’s tariffs and how they might affect the stock market. In fact, a whopping 57% of U.S. investors have a negative outlook on the market, according to a survey from the American Association of Individual Investors released this week.
To be clear, it’s uncertain right now whether this dip will turn into a full-blown bear market or recession. But if a steeper downturn is coming, there’s one ultra-important move to make right now.
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One smart move to protect your investments
During periods of market volatility, one of the best ways to protect your money is to ensure you have a solid emergency fund.
No matter how far the stock market drops, you won’t actually lose any money unless you sell your investments. For example, say that you buy one share of stock for $100. If that stock’s price drops to $75 per share, selling at that point would lock in losses of $25. However, if you hold on to your stock and it eventually rebounds to, say, $150 per share, selling then would earn you a $50 profit.
If the market continues to decline, your portfolio could lose a substantial amount of value in the near term. If you hold your stocks until prices eventually recover, you likely won’t lose anything. But if you withdraw your money after prices have fallen, you could end up locking in serious losses.
For that reason, it’s critical to have at least three to six months’ worth of savings stashed in an emergency fund. If you face an unplanned expense during a market downturn, you can lean on your emergency savings rather than pulling money from your investment account and risking significant losses.
Should you invest at all during a market downturn?
If you’re nervous about a potential market crash, it can be tempting to avoid investing altogether until stocks stabilize. However, while market downturns are daunting, there’s a major silver lining: Stocks are essentially on clearance.
The last couple of years have been prosperous for the market, but it’s also been an expensive time to buy, as stock prices reach record high after record high. Downturns, then, can provide a chance for investors to load up on normally pricey stocks at a steep discount.
Not all stocks will be good investments in times like these, though. Companies with shaky fundamentals — such as those that lack a competitive advantage, for example, or have a leadership team with a history of making questionable decisions — will have a tougher time recovering from periods of volatility.
Strong stocks with healthy fundamentals are more likely to see long-term growth, no matter how rough the short term may be. By loading up on these stocks while their prices are lower, you can set yourself up for serious gains when the market rebounds.
If you choose to invest, just be sure you can keep your money in the market for at least a few years. The average S&P 500 bear market has lasted for around 286 days, historically. While the market will inevitably recover if we enter a new bear market, it could be a while before we reach the turning point.
Nobody knows what the next few weeks or months will look like for the stock market, and that uncertainty can be nerve-wracking. But when you have a solid emergency fund and an investing plan, you can ride out any stock market storms and set your sights on long-term gains.
Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.