The stock market might seem overly complicated, but it operates on an basic premise. If demand is high and supply is constant, stocks go up. If demand is low and supply is constant, stocks go down. There are a million and one factors that could drive supply and/or demand, but at the end of the day, stocks go up or down. That’s pretty much it.
Yet the stock market can’t always go up. If the market declines over a lengthy period of time, you might see your investments slip with it. This could bring upon the nagging feeling that you could potentially lose some or all of your money. When things take a turn for the worse — like a crash or a recession — you might be inclined to sell everything (perhaps at a loss), take your money, and leave the investing world entirely.
This is a terrible idea. To understand why, you first must get an idea of how the stock market works — and why a decline is actually quite normal.
It’s normal for the stock market to go down (and it might go down soon).
The American stock market has been in a “bull run”, or upward trend, for over eight years now. It’s wildly speculated (though not confirmed) that the market will have a “bear run”, or downward trend, in the months or years to come. Stocks and stock indexes are at their highest levels of all time, and have only increased in value over the last several years. This isn’t sustainable, as assets and securities can’t keep growing and growing forever. The market also often changes direction after every new U.S. presidency, which it has yet to do after President Trump’s election. Those record highs are going to have to come down at some point.
This doesn’t necessarily mean a market crash. The 2007-2008 financial crisis and the Great Depression had real causes that triggered mass layoffs, loss of capital, and other horrible financial events seemingly overnight. Events like the early ’00 dot-com bubble burst, on the other hand, were triggered by overvalued stocks that caused market corrections and downturns, but not a sudden, ultimate crash.
The stock market goes up and down, but it historically increases.
The stock market goes up over time. It might go down for months, if not years at a time. Yet it can also only go down for so long. After a period of time, the market will go back up again. When it does, it often beats record highs and keeps surging…until another “bear run,” of course.
This is why many people invest in index funds. If stock indexes historically increase over time, then the exchange-traded funds following them will increase, too. If the market decreases, the funds decrease in value. Yet if the market goes back up again — which it historically does — these funds will rise in value once again.
Seeing your stocks and securities decrease might be a cause for concern. You might even get the inkling to sell off your stock when they dip below a certain level. Yet if you hold on to them and wait out a down period in the market, you could likely end up making more on your stocks when the market goes back up.
When the market is down, buy more stock.
You’ve heard the basic premise of “buying low and selling high.” When the market is at record lows, stocks that were once expensive to buy suddenly become quite affordable, and in much higher quantities. If you purchase shares at a stock or index’s low point, you have the potential to make back a considerable amount when the market goes back up.
So, instead of selling off your entire portfolio, add to it. It could end up making you bank when the good times roll around. This is especially important if you’re investing for long-term growth and not the here-and-now.
Nothing is certain.
You have to be from the future to know how a stock will perform tomorrow. Since you’re not a time-traveling wizard, you have to assume a certain amount of risk when investing. After all, the market could go up after a down period. The market could level off for a few years and stop decreasing, but make few increases. The market could tank and bring the end of capitalism as we know it. (The third scenario is highly unlikely.)
There are many ways to avoid total financial ruin. Diversifying your investments could mean the difference between losing it all and losing some. Keeping an emergency fund around could bail you out of a crappy financial situation.
You should invest in the stock market to help your retirement and have your money make money. At the same time, you shouldn’t put all of your money in the market. If the world economy is hit by tough economic times and you need access to money, take it from anywhere but your portfolio. You’ll thank yourself when things get better.