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The stock market has long been a source of anxiety for many Americans. In times of social and economic crisis, the stock market has been known to fluctuate so rapidly that it can make investors uncomfortable. In fact, many may be afraid to invest in the stock market for fear of these very fluctuations.
Still, a Gallup poll found that 58 percent of Americans own stocks. This is a significant part of the population, despite investment anxieties. This is likely because history shows that despite some pretty serious crashes, long-term investors can still make a respectable return.
Although we cannot know anything about the future with 100% certainty, there are certain things that are very likely to happen. For example, the odds are extremely high that US citizens will still be required to pay taxes on their income 30 years from now. Similarly, there is a high probability that the stock market will also be higher at this point than it is today.
To understand why we can expect this, it is first important to understand how the stock market works. Here’s what you need to know about investing in the stock market and why it’s been a consistent winner for long-term investors.
The short version:
- The stock market has definitely seen its fair share of dips since it started, but so far, it has always bounced back.
- Long-term investors should not fear when the stock market falls, as they can probably make up the losses over time.
- Even with the risks, investing your money tends to pay a much better return than savings accounts and other savings vehicles.
The Stock Exchange, Briefly
In simpler terms, the stock market is a place where investors buy and sell shares, or parts of public companies. So when you hear someone say they “own Apple stock,” what they mean is that they’ve bought small pieces of ownership in the company in hopes of making money from the company’s growth.
The history of the stock market dates back to the 1700s with the creation of the Philadelphia Stock Exchange. It was founded to enable established companies to raise more capital than they could raise on their own. The New York Stock Exchange quickly followed, and today it is the largest stock exchange in the world, with a value of $24.5 trillion among all the companies that make it up. (And yes, that’s one billion with one T.)
What is a stock market crash?
Why would anyone distrust an institution as old and revered as the stock market? One reason could be that throughout its long history, the stock market has fallen many times. Such crashes can have devastating results, plunging millions into debt and job losses, as was the case with the Great Recession of 2008.
Usually driven by major world events such as war and uncertainty, global pandemic and irresponsible industry practices, Stock market crashes are marked by a sudden drop in the price of most individual stocks.
People start to panic and pull their money out of the market and sell their stocks as quickly as possible for fear that they will never recover.
The onset of COVID-19 created the 2020 crash, one of the more recent notable crashes. 2022 hasn’t fared much better, with the year starting with decades-high inflation rates and a war between Russia and Ukraine. This caused a sharp drop in the stock market performance.
How do we know the market will recover?
So far, as history has shown, the stock market has always recovered from a downturn. Does this mean it will continue to do so forever? Not necessarily. It is impossible to predict what may happen. We can only look at what has happened
Fortunately, what we can take from the story is good for stock investors. In the case of the Great Recession, the market began to decline in December 2007, but began to recover in the first quarter of 2009.
Bear markets — or times when we see a stock market crash — happen about every five and a half years, so they’re definitely common. But bull marketsor times when the stock market starts to rise again, occur with higher frequency. In short, there are more good years than bad, historically.
More information >>Bear versus bull market
Should you ever panic during a market crash?
When something goes wrong, your first instinct is likely to be to leave the situation. The same goes for the stock market. When a crash occurs, many investors pull their investments and reinvest elsewhere. Overall, this is a terrible strategy. If you’re young and investing for retirement, stay on track.
For the S&P 500 (an index made up of the top 500 US companies), when the market is down, stocks fall an average of 36%. But they rise 114%, on average, during bull markets.
With more bull markets than bear markets (at least so far), the odds are in favor of an eventual positive return.
Related>>How to Invest in the S&P 500 Index
Why investing is still a good income opportunity
If every investment involves a certain amount of risk, is it worth it? Simple math shows that savvy investing can earn you more than interest in a savings account. Even your average high-yield savings accounts rarely offer anything close to 1%. Over time, different types of investments have outperformed this performance.
Here are some investment categories and their average returns (just remember these are general numbers and your experience might be different):
How to choose what to invest in today
Choosing where to invest today when you have no idea what it’s asking for can be a difficult task. The answer will vary based on several factors, including:
When you want to see a return
In general, the safest investment options do not offer a get-rich-quick option. If you’re investing for retirement, you’ll need a long-term strategy that will likely be based on more “traditional” investments like stocks, bonds, ETFs, and more. For those investing money, say, putting a down payment on a house over the next five years, CDs and other low-risk investment options are better because you have less chance of losing money.
How risky are you willing to be?
All investment is inherently risky. However, some investments are riskier than others, and that can be a good thing or a bad thing. If you invest for the long term, you can benefit from the biggest upside swings in riskier growth stocks.
However, you should be careful how much you want to sink into a very risky investment like cryptocurrency. With crypto prices constantly falling, it is not a reliable investment for those who want a safe and long-term plan.
>>Don’t know how much you can afford to invest? Learn how to determine your risk tolerance
What will you need the money for?
There are many reasons why people invest for shorter time periods. Planning for college, retirement, and other important milestones will require years of investment. Goals like paying for a wedding or a down payment on a house have shorter turnaround times since you’ll need the money after a few years.
How much money are you investing?
If you do not have a large amount to invest, some avenues such as buying real estate will not be available at this time. If you have a small amount of money, consider more manageable investments like those offered by a robo-advisor. Many of these advisors have no minimum investment requirements.
There is also a bit of personal preference associated with choosing your investments.
Popular investment options
Once you’ve narrowed down your risk tolerance, time horizon, and investment amount, you can start reviewing your options. Here are some of the main investment options available and who they are best suited for:
Consider actions if…you are investing for a long time for goals like retirement. The stock market offers an average return of 10%, making it a generally lucrative investment. Also, if you really want to invest in a specific company, stocks are the way to go.
Consider ETFs or mutual funds if…want an easy way to invest in multiple stocks and other investments through a single fund. Both ETFs and mutual funds offer a variety of investments, often organized around different goals and values. For example, there are funds that follow environmentally friendly investments or certain business sectors.
Consider real estate if… you are okay with taking some risk and have a large amount of money to pay up front. Real estate investing is perhaps one of the most lucrative investment options, as long as the person investing has a lot of knowledge and maybe a little luck. However, you may need to be an owner to get a high profit, and for some, that’s not worth the time. Learn more about real estate investing here.
Consider a robo advisor if…you want to invest but you don’t have the knowledge or desire to manage your own investments. The robo-advisor will manage your portfolio according to your risk tolerance. Sometimes you can even select some of the types of investments you want or don’t want in your portfolio. You will have to pay a fee most of the time, but this could be worth it for many investors.
Related>>5 Ways Robo Advisors Reduce the Cost of Investing
Think crypto if… you are willing to take a LOT of risk and are interested in the potential technology behind cryptocurrency. Crypto is a very new investment option that has an extremely volatile history. Be careful, do your due diligence and never invest more than you can afford to lose.
bottom line
While there’s no way to know for sure that your investments will even out after a stock market crash, history tells us that most portfolios rebound.
Of course, the damage will depend on the type of investments you have; you still need to pay attention to what you invest in, how much you invest in it, and whether it makes sense when you expect to do it. withdraw
However, those who invest for long periods of time are better off sitting back and letting their investments do the work.
Just get your feet wet? Check out these introductory investing guides >>
