As a new investor in the stock market – and this hold true for many seasoned investors – one of the scariest possible events is a stock market crash. The idea of a crash fills an investors mind with thoughts of large losses, possibly to the point of wiping out some investments. The fear of a crash may prevent you, as a new investor, from participating in the stock market and not allow you to benefit from the long-term accumulation of wealth a well conceived investment plan will produce.
Although the stock market moves in an upward direction over the long term – building wealth for investors in stocks and mutual funds, the market also moves in cycles of positive value gains followed by periods of declining values. The periods of upward price movement are referred to as bull markets. Bull markets in the stock market last from a few years to a decade or longer. A period when stock values are declining is referred to as a bear market. Bear markets are sharp and abrupt compared to bull markets. A stock market crash is the worst type of bear market, when the market loses a significant amount of value in a few days or a few weeks. A market crash is big news and both the financial news sources and the mainstream news outlets will run with the story. The resulting flood of news stories concerning a crash will generate more fear in investors. Many unprepared investors will immediately sell out of their stock market holdings, taking large losses on their investments. Many more will wonder if they should also sell. The bottom line result is that a market crash is a scary event for investors and without a plan and most will probably make the wrong decisions and lose a lot of hard-earned money.
The first thing you as a new investor must understand is that the occasional market crash will occur. The investment strategies you select must take the probability of a crash into consideration. The second point is that crashes occur much less often than the predictions concerning a possible crash would suggest. There is big money to be made from selling doom-and-gloom, market crash predictions. What could be considered market crashes have occurred just three times in the last 40 years. However, in the current investment environment, crashes tend to be on investor minds with two very deep bear markets occurring in the last 12 years. Of those two, one – in 2000 and 2001 – was pretty easy to see coming, but the second – in 2008 – definitely looks like a crash on a long-term stock market chart. The final point a new investor must remember is that the market has always recovered from each crash and moved significantly higher in subsequent years. Arguably the most famous crash in the modern era – the 1987 crash where the market dropped by almost 40 percent in less than a week – is now a hardly visible blip on the long term market chart. The recent 2008 market crash will also look like a blip a couple of decades in the future when your investment portfolio is worth many times the value you have invested.
As an investor, your greatest danger when a stock market crash occurs is giving in to the fear and selling off your stock market investments just after the crash occurs. It takes mental strength to fight the fear and stay with the investment strategies you are using to build long term wealth. A market crash will make it seem as if all of your plans were futile and you have made a big mistake by investing in the market. If you stick to your investment plan, you will get past the crash and your wealth building will continue. In your investment planning, the possibility of a market crash should be included in your timing considerations of when you plan to withdraw money from your investment accounts. For example, if you are building an investment portfolio for retirement, the portion of stock market investments in the portfolio should be reduced as your retirement date approaches. It is not good planning to be 100 percent invested in the stock market if you need money each year from your investments as part of your retirement income.
The best way for you to avoid the “sell it all now!” fears of a stock market crash or lingering bear market is to establish and investing plan which eliminates any timing concerns in the market. One strategy is to use a plan of periodic investments, investing the same amount into your stock index mutual funds every month or every quarter. Another strategy is to set up a firm asset allocation plan and re-balance between stocks and other investments – such as a bond fund – on a regularly scheduled basis. Using a combination of these strategies plus the other information available here on Beginning-Investing-Made-Easy.com will put you far ahead of most individual investors. You will build your wealth with a minimum amount of time spent managing your investments and earn the maximum amount of sleep, without worries about your investment values.
