If a market downturn is looming, should you withdraw now or stay invested?
Key Points
- Market downturns are normal, but they can still wreak havoc on your investments.
- Pulling your money out may seem like a smart option to keep your savings safe.
- With the right strategy, you can give your investments the best chance at surviving volatility.
The stock market can be turbulent and unpredictable, and it's sometimes nerve-wracking to invest your life savings. When the market dips, nobody likes seeing their investments take a turn for the worse.
Although the stock market has been on a remarkable upward trajectory over the past year, it will likely experience a downturn sooner or later. That doesn't necessarily mean the market will crash tomorrow, but ups and downs are normal and to be expected.
If stock prices do start to fall, pulling your money out of the market may seem like the smartest and safest option. But is that the right move?
Image source: Getty Images.
Just how common are market downturns?
There's no doubt about it: Market downturns are intimidating. Whether you've just started investing or have been buying stocks for decades, few people are truly comfortable with watching their investments plummet in value.
That said, downturns happen regularly and are not as daunting as they may seem. Since 1928, the S&P 500 has experienced 21 separate instances where stock prices fell by more than 20%, according to data from consulting firm Yardeni Research. That's one relatively severe downturn approximately every 4.5 years.
The good news is that regardless of how severe those crashes were, the S&P 500 has recovered from every single one of them so far. If the market does experience another dip, there's a very good chance it will recover once again.
^SPX data by YCharts
Would pulling your money out keep it safer?
Although market downturns are relatively common, it still may seem like a smart idea to pull your money out before prices fall. While that strategy makes sense, it's much tougher to pull off than it may seem.
It's easy to look back in hindsight and wish you'd pulled your money out of the market right before it crashed. But in the moment, it's nearly impossible to know when, exactly, prices will drop. Market crashes can be unpredictable and unexpected, and even the experts don't always know when they'll happen.
If you withdraw your money at the wrong time, it could be a costly mistake. Say you're worried the market will crash soon, so you pull all your money out today. But the market doesn't crash, and instead, stock prices continue going up. You decide to reinvest your money, but because prices have increased, you end up paying more for your investments than what you sold them for.
Or, say you pull your money out of the market but choose not to reinvest because you're worried prices will fall soon. When your money isn't invested, it's not growing as much as it could. And the longer you wait to get started investing again, the more you're limiting your earning potential.
How to keep your investments safe
One of the most important things to remember when investing in the stock market is that you don't lose any money until you sell your stocks. The market could plummet tomorrow, but as long as you don't sell, you haven't lost any money.
Holding your investments despite market volatility, then, is a smart way to keep your money safer. The market may dip and your stocks may decrease in value, but as long as you're buying the right investments, there's a very good chance they'll recover. When that happens, your portfolio will bounce back stronger than ever.
Market crashes can be intimidating, but the good news is that they are normal and temporary. By holding your stocks and avoiding the temptation to pull your money out of the market during periods of volatility, you can maximize your earning potential and help your money grow as much as possible.