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
Where is your money safe if the stock market crashes? Money held in an interest bearing account like a money market account, a savings account or others is generally safe from losses stemming from a stock market decline. Bonds, including various Treasury securities can also be a safe haven.
Do I lose all my money if the stock market crashes? ›
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.
How do you protect your investments from a market crash? ›
Investors can preserve their capital by diversifying holdings over different asset classes and choosing assets that are non-correlating. Put options and stop-loss orders can stem the bleeding when the prices of your investments start to drop. Dividends buttress portfolios by increasing your overall return.
Where is the best place to put money during a stock market crash? ›
Where to Put Your Money Before a Market Crash
- Boost Your Wealth's Stability: Cash and Equivalents. ...
- Go for Safety: Government Bonds. ...
- Go for Gold, or Other Precious Metals. ...
- Lock in Guaranteed Returns. ...
- Invest in Real Estate. ...
- Convert Traditional IRAs to Roth IRAs. ...
- Roll the Dice: Profit off the Downturn. ...
- Use the Tax Code Tactically.
The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.
Can the bank take your money if the stock market crashes? ›
You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
Why do 90% of people lose money in the stock market? ›
One of the reasons for the loss in the stock market is that people do not decide the amount of their investment. This is also a big mistake. Because the investment amount is not fixed, they invest most of their money in the stock market. Due to which they do not have enough money even for emergency times.
What happens to your money in the bank during a recession? ›
Your money will be secured in a bank account during a recession, but only if the bank is FDIC-insured. And if you bank with a credit union, your money is secured if the credit union is insured by the National Credit Union Administration (NCUA).
Who gets all the money when the stock market crashes? ›
- When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else.
- Essentially, it has disappeared into thin air, reflecting dwindling investor interest and a decline in investor perception of the stock.
The worst thing you can do to your 401(k) is to cash out if the market crashes. Market downturns are generally short and minimal compared to the rebounds that follow. As long as you hold on to your investments during a bear market, you haven't lost anything.
How to prepare yourself for a recession
- Reassess your budget every month. ...
- Contribute more toward your emergency fund. ...
- Focus on paying off high-interest debt accounts. ...
- Keep up with your usual contributions. ...
- Evaluate your investment choices. ...
- Build up skills on your resume. ...
- Brainstorm innovative ways to make extra cash.
1. Don't panic-sell The most important thing not to do in a market crash is panic-sell. People can get very nervous watching their life savings drop in value, but once you hit the sell button, you can't get it back without starting again from scratch. Market crashes are often temporary.
How do you avoid losing money in a stock market crash? ›
Don't sell your investments, and don't worry about trying to time the market. Simply hold onto your stocks and ride out the storm. The reason this strategy works is that you don't technically lose any money unless you sell. Your portfolio might lose value, but losing value is different than losing money.
Should you have cash on hand during a recession? ›
Finance Experts All Say the Same Thing
They all said the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.
How do you make a lot of money when the market crashes? ›
Bear market investing: how to make money when prices fall
- Short-selling.
- Dealing short ETFs.
- Trading safe-haven assets.
- Trading currencies.
- Going long on defensive stocks.
- Choosing high-yielding dividend shares.
- Trading options.
- Buying at the bottom.
When you lose money in the stock market, the value of your investment decreases, but the money itself doesn't disappear into thin air. Instead, it essentially gets transferred to the investors who sold their shares at a higher price.
What is the safest fund during a market crash? ›
Options to consider include federal bond funds, municipal bond funds, taxable corporate funds, money market funds, dividend funds, utilities mutual funds, large-cap funds, and hedge funds.
Where is the safest place to put your money during a recession? ›
Investors often gravitate toward Treasurys as a safe haven during recessions, as these are considered risk-free instruments. That's because they are backed by the U.S. government, which is deemed able to ensure that the principal and interest are repaid.
Can you lose all your money in a 401k if the market crashes? ›
The worst thing you can do to your 401(k) is to cash out if the market crashes. Market downturns are generally short and minimal compared to the rebounds that follow. As long as you hold on to your investments during a bear market, you haven't lost anything.
