If you're worried about potential volatility, here's how to keep your portfolio safe.
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.
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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.
FAQs
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.
How can you protect your investments from stock market crash? ›
Portfolio diversification
A diversified portfolio can be one of your best defenses against the effects of a stock market crash. Diversification means having the appropriate mix of stocks, bonds, cash and perhaps alternative investments that is aligned with your investing time horizon and your risk tolerance.
What happens to my money when a stock goes down? ›
“In other words, the money did not exist or disappear for long-term investors if you did not make any transactions. However, for short-term investors, when stock prices go up or down, the money would be transferred among them as a zero-sum game, i.e. your losses would be others' gains, and vice versa.”
Where is the safest place to put your money during a recession? ›
The Bottom Line
If you're wondering where to put your money in a recession, consider a high-yield savings account, money market account, CD or bonds. They can provide safe places to store some of your savings. It's worth noting that a recession doesn't mean you should pull all your money out of the stock market.
Where should my money be if the market crashes? ›
If you are a short-term investor, bank CDs and Treasury securities are a good bet. If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds.
What happens to my investments if the economy crashes? ›
Key Takeaways. An economic or financial crisis can send asset prices reeling and lead to recessions and periods of high unemployment. While falling prices may hurt your investment accounts in the short run, a crisis may also present unique buying opportunities to grab assets while they are essentially on sale.
Should I take my money out of the stock market now? ›
Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
Who gets the money when stocks lose? ›
When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Drops in account value reflect dwindling investor interest and a change in investor perception of the stock.
Can banks seize your money if the economy fails? ›
Banks during recessions FAQs
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
Is it better to have cash or property in a recession? ›
Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
Just as a high number of buyers creates value, a high number of sellers erodes value. So even though it might feel like someone is taking your money when your stock declines, the cash is simply disappearing into thin air with the popularity of the stock.
Are money market funds safe in a crash? ›
As stated above, money market funds are often considered less risky than their stock and bond counterparts. That's because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-Bills), and short-term commercial paper.
Do you owe money if a stock crashes? ›
In a standard cash account, you can't end up in debt if a stock goes down. However, if you're trading on margin, that's a different story. Margin accounts can lead to debt if you're not careful.
Should I pull my money out of the stock market before it crashes? ›
Unlike the rapidly dwindling balance in your brokerage account, cash will still be in your pocket or in your bank account in the morning. However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.
