Despite currently experiencing a booming bull market (with the S&P 500 up by more than 48% from its low in 2022), many investors are already worried about when stocks will take a turn for the worse.
The market can be incredibly unpredictable in the short term, so it’s anyone’s guess how long this bull market might last. But downturns are a natural part of the market’s cycle, so we do know that at some point, a bear market is unavoidable.
In some cases, a stock market crash can also occur during periods of volatility. Crashes are generally defined as a steep drop that happens in a short time — like the crash in early 2020 when the S&P 500 plummeted by roughly 30% in a matter of weeks.
Now, there’s no way to know for certain when the next market crash will hit. That said, it can be helpful to understand how they affect your money, as well as how to start preparing so that your portfolio is as protected as possible.
Where does your money go during a market crash?
One of the more confusing aspects of market downturns for many investors is where the money actually goes. If you have a certain amount in your investment account and that balance drops during a market crash, what happens to that money?
It doesn’t actually go anywhere, as confusing as it may seem. While it appears that you’re losing money during a market crash, in reality, it’s just your stocks losing value.
For example, say you buy 10 shares of a stock priced at $100 per share, so your total account balance is $1,000. If that stock price drops to $80 per share, those shares are now only worth $800. If you choose to sell, you’ll be out $200 because you paid $1,000 but only earned $800 back. That doesn’t mean that $200 has gone to any other investor; rather, your investments simply aren’t worth as much now as they were when you first purchased.
Choosing to sell is the key element here, though. Say that instead of selling, you simply held onto your shares and waited for the market to rebound. Eventually, say your stock climbs back to $100 per share, and your balance is back where you started at $1,000. If you sell at this point, you won’t have lost anything.
The simplest way to protect your money
Nobody knows when the next market crash may occur. But that doesn’t mean you can’t start preparing anyway so that you’ll be ready when it happens.
Perhaps the simplest way to protect your money against any type of market volatility is to take a buy-and-hold approach. Again, you technically don’t lose any money in the stock market unless you sell your investments. If you simply hold your stocks until the market rebounds, your stocks should regain their value.
The key is to ensure you’re investing in strong stocks that have the ability to weather market turbulence. These stocks will still likely experience short-term ups and downs, but as long as the companies behind them are healthy, they’re far more likely to see their prices rebound when the market inevitably recovers.
The stock market can be daunting at times, especially when nobody knows precisely when the next downturn will happen. But by investing in quality stocks and holding those investments for the long term, you can rest easier knowing your portfolio is well-positioned to survive even the worst crashes.
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Here’s What Happens to Your Money When the Stock Market Crashes — and How to Protect Your Investments was originally published by The Motley Fool
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