It has been a difficult year for the stock market so far, and the past few weeks have been particularly shaky.
After a short bear market rally, S&P 500 has fallen by more than 7% since mid-August. The tech-heavy Nasdaq has also fallen more than 10% during that period, and many investors are concerned that this could be the start of a market crash.
There is a chance that stock prices will continue to fall and that we are headed for a bigger downturn. But the good news is that it doesn’t necessarily matter if the market crashes. This is why.
Image source: Getty Images.
What history teaches about market crashes
No one can predict exactly how the market will perform in the short term. Stock prices can be erratic and even the experts can’t say for sure what will happen in the coming weeks or months.
What we do know, however, is that the market is incredibly consistent over the long term. And if history teaches us anything, it’s that there are good reasons to be optimistic about the future of the market.
Since 1980 alone, the S&P 500 has fallen 20 times by at least 10%. Some of those crashes were also serious. For example, during the Great Recession, the S&P 500 lost nearly 57% of its value at its lowest point. In the dotcom bubble that burst in the early 2000s, it fell by nearly 50%.
However, the S&P 500 has also returned nearly 3,600% over the same period. Despite all this volatility, the stock market has an incredible track record of recovering from even the worst crashes.
^SPX data by YCharts
This is not to say that market crashes are not nerve-racking. No one wants to see their portfolio fall in value, and this downturn can be difficult for even the most experienced investors to bear.
Over time, however, the market is much safer than it seems. Even if a crash is imminent, you can reap those long-term gains by holding out and staying invested.
The secret to making money in the stock market
While it can be intimidating, one of the best ways to maximize your earnings is to keep investing during recessions.
Again, stock market crashes are not easy. But they are one of the best opportunities to buy. Stock prices are significantly lower during a downturn, meaning you can make solid investments at a fraction of the cost.
Then, when the market inevitably recovers, you reap the rewards. Example: Between 2009 and 2010, during the recovery phase of the Great Recession, the S&P 500 returned almost 70%. If you had invested during the trough of that downturn, you would probably have made significant gains in a relatively short period of time.
It is uncertain whether a market crash is imminent, but the future is not as bleak as it seems. By continuing to invest and maintaining a long-term view, it is possible to make a lot of money in the stock market.