If there is one thing that is certain about the stock market, it is that stocks will rise and stocks will tumble. They sometimes even crash. The idea of a stock market crash — especially in these trying times — sounds scary. But here are five reasons why you do not have to worry about it.
1. You don’t need your invested money right away
If you have followed one of the most basic tenants of investing, you should not have been investing funds in the market that you could not afford to lose, if indeed there was a crash. You should only be investing money that you “could do without” for the long term. The last thing you want to happen is to be forced to sell more shares than you intended in order to cover a bill you have due. If that happens to you, you’ll find you have less money participating in any recovery that follows. Thus, you will reduce the wealth you wind up with. You should invest money that you may need more immediate access to in savings or money market account, CDs, or a duration-matched Treasury or investment-grade bond ladder – not the stock market.
2. You will be OK as long as you are not leveraging margin
In strong markets, leveraging margin can magnify your returns and make you feel like an investing genius. When things turn sour, however, that magnification effect works against you. Not only that, but your broker also has the right to change the terms of your margin agreement. They can do so at any time for any reason. If you’re not using margin, then no matter what the market does, you can’t be forced out of your position just due to falling share prices. That makes it far easier for you to both make it through the crash and stay invested as the market turns back upward.
3. You have a solid emergency fund in place
No need to worry about a stock market crash if you have adequate emergency savings in place. With an emergency fund with around three to six months of expenses in it, you can be ready for a temporary disruption to your income stream. This includes a major fall in the market. That can help you reduce the temptation to pull money out of the market if your job starts to feel insecure. It will also give you a little bit of breathing room in the event you do lose your job.
4. You are still getting dividends
The market prices stocks based on a company’s future prospects. However, companies typically pay their shareholders dividends based on the actual cash they are generating today. In many instances, a company is able to maintain and pay its dividend even when its share price falls. If that is the case, this is a good reason not to panic. It’s usually a sign that the company’s leadership believes that any challenges will be short-term and its core remains solid.
5. You understand that your stocks are ownership stakes in companies
Before you get rattled during a crash, remember that a share of stock is nothing more than a fractional ownership stake in a company. When you own stock, you own part of that business. The market’s pricing of those shares rarely has any impact on the company’s ability to operate, profit, or pay dividends. As long as its operations remain solid and its prospects remain decent, a market crash presents an opportunity to buy even more shares in the business for less money. It’s one of Warren Buffett’s most successful strategies. And it’s one that’s just as available to us mere mortals as it is to the Oracle of Omaha.
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