A market drop may be on the way. Here’s why you don’t need to worry.
The stock market has soared in recent years, S&P 500 It’s up more than 55% from its late 2022 lows.
However, stock prices cannot continue to rise forever and will fall sooner or later. According to a July 2024 survey by the American Association of Individual Investors, about 26% of investors are pessimistic about the state of the market six months from now. Some experts predict that a recession is looming, unsettling many investors.
The future of the market may be uncertain, but there is a silver lining. It doesn’t necessarily matter what happens to stocks in the coming weeks, months, or even next year. Here’s why.
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The Stock Market’s Secret Weapon
Stock markets often experience strong short-term fluctuations that can be unsettling and normal, but despite these ups and downs, the long-term performance of the market has been remarkably stable and positive.
Time is a stock market superpower, and if you stay invested long enough, you’re almost guaranteed to see a positive total return. Even if the market drops significantly in the coming months, it will always recover eventually. All you need to do is hang in there and wait for stocks to recover.
For example, in the past two decades alone, markets have faced some of the most severe crashes and recessions in history, including the dot-com bubble burst, the Great Recession, the COVID-19 crash, and the most recent recession throughout 2022.
For example, let’s say you invested in an S&P 500 index fund in January 2000, right before the S&P 500 index entered its longest bear market in history. The next few years would have been tough, but if you had held on to your investments instead of selling, you would have made a total return of nearly 277% to date.
^SPX data provided by YCharts
With a buy-and-hold approach, market fluctuations have less of an impact on your long-term savings. Rather than getting caught up in what the markets will do in the coming weeks or months, you’re better off focusing on the long-term potential of your portfolio.
Maximize the chances of your portfolio’s survival
There is a big caveat to the long-term investment approach: you need to choose the right investments.
Some stocks may perform well in the short term when the market is booming, but have a hard time weathering downturns. Even strong stocks can take a big hit during periods of market volatility, so it can be hard to tell which investments will perform well over the long term.
To ensure you pick the best stocks, it’s wise to take a closer look at a company’s underlying business fundamentals, not just market performance.
If a company is fundamentally healthy, it has a better chance of surviving even the worst of a downturn. But if the company is showing some warning signs — for example, if it’s struggling to maintain a competitive advantage in its industry or if its management is consistently making questionable decisions — then recovering from a downturn may be more difficult.
Doing your due diligence is key to weathering a market downturn, and while no one knows if a crash will happen in 2024, investing in the right places and maintaining a long-term outlook can help you prepare for anything that may come your way.
