Key Points
Market downturns have always been followed by recoveries.
Long-term investors can usually ride out downturns. Short-term investors can get burned.
For best results when investing, take time to learn a lot about the stock market and about how to invest effectively. Alternatively, you can opt out of that and stick with low-fee, broad-market index funds, such as S&P 500 index funds, which can also build your wealth powerfully.
Either way, here's one key thing every investor should know about the stock market: It will crash now and then.
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Portfolio values don't go up in a straight line. The line will be jagged, marked by occasional corrections and occasional crashes. Corrections are drops of at least 10% from recent highs, and drops of 20% or more are considered a crash.
Here are some things to know about market pullbacks:
- They're not infrequent. According to my colleague Trevor Jennewine, "Since 2010, the S&P 500 and Nasdaq Composite have dropped into correction territory 10 times (once every 18 months) and 14 times (once every 13 months), respectively."
- Crashes, followed by bear markets, are less frequent. Bear markets happen, on average, about every 3.5 years.
- They don't necessarily last a long time. The average length of a bear market, since 1928, has been 11.4 months, according to Yardeni Research.
- The stock market has lost about 35%, on average, in bear markets, says The Hartford Funds, while bull markets have averaged gains of 111%.
- Recoveries can be strong. Jennewine writes: "Since 2010, following the S&P 500's first close in correction territory, the index has returned an average of 18% during the next year and 38% during the next two years."
What should you do?
Instead of worrying about a market crash, simply prepare for one:
- Don't keep any money in stocks that you might need within at least five years.
- Consider holding on to a bunch of healthy dividend-paying stocks and value stocks, as they can be more stable than high-flying growth stocks when there's a market pullback.
- Consider keeping a modest portion of your portfolio in cash, to take advantage of great stocks on sale after a market crash.
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