Nervous about investing? Why the stock market is safer than it looks
It’s been a turbulent year for the stock market, with major indexes still significantly below their peaks. Combined with the constant worry about a recession and a potential stock market crash, this can be a troublesome time to invest.
Amid all this uncertainty, it’s natural to wonder how safe the stock market really is. When your life savings are on the line, no one wants to lose money by investing at the wrong moment.
While there are legitimate concerns when it comes to the market, in the long run, it’s much safer than it might seem. Here’s why.
Long-term performance is king
Volatility is common in the short term, and even experts can’t predict exactly how the market will perform. There is a possibility that a stock market crash is looming, and your portfolio will likely drop in value temporarily if that happens.
However, the short-term ups and downs are not as important as the long-term market performance. No matter what happens over the next few weeks or months, the market is likely to see positive average returns over time.
In other words, even if the market crashes tomorrow, you can still make a lot of money in the long run.
Case in point: In just the past two decades, the stock market has experienced the bursting of the internet bubble, the Great Recession, the March 2020 crash, and countless small downturns along the way. In spite of everything, though, the Standard & Poor’s 500 It has increased 170% since 2000.
Also, the S&P 500 has historically generated an average rate of return of around 10% per year. This means that the good years and the bad years have averaged returns of nearly 10% per year over the long term.
These returns are much higher than what you see by storing your money in a savings account, which only offers interest rates ranging from 1% to 2% at best. At this rate, your money is not keeping pace with inflation, which means that it will lose purchasing power over time.
Risks to consider before investing
The stock market is a powerful hub for wealth generation, and investing is one of the most effective ways to grow your savings. But it is best suited for those who have at least several years (or ideally two decades) to leave their money in the market.
Since the stock market can be unpredictable, no one knows exactly how it will perform over the coming months. And if we face a more severe recession or crash, it could take years for the market to fully recover.
This is normal, and not necessarily a bad thing. But if you’re about to retire or anticipate that you’ll need your savings in the next year or two, investing right now can be riskier. If stock prices drop and then you decide to withdraw your savings, you may end up selling your investments at a loss.
Investing in the stock market can be intimidating, especially during periods of volatility. But in the long run, this is one of the safest ways to generate wealth. By continuing to invest even when the market is volatile, you will reap the gains in the future.