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 to protect your money from a stock market crash? ›
Diversification into non-equity-based assets, such as bonds, property and commodities, can also protect your portfolio in the event of a stock market crash. It's important to pick assets that aren't correlated, in other words, their price movements do not move up and down together, but rise and fall at different times.
Where is your money safe if the stock market crashes? ›
Bonds usually go up in value when the stock market crashes, but not all the time. The bonds that do best in a market crash are government bonds such as U.S. Treasuries. Riskier bonds like junk bonds and high-yield credit do not fare as well.
What to do when you lose all your money in the stock market? ›
"If you want to stay invested, sell at a loss and use the proceeds to buy into a similar, but not substantially identical, fund," Wybar says. "This way you can recoup the loss and participate in upside returns when the market goes back up."
What happens to my 401k if the stock market crashes? ›
What Happens to My 401(k) If the Stock Market Crashes? If you are invested in stocks, those holdings will likely see their value fall. But if you have several years until you need your retirement account money, keep contributing, as you may be able to buy many stocks on sale.
Will I lose my money in the bank if the market crashes? ›
Your money will not be lost. It is usually transferred to another bank with FDIC insurance, or you'll receive a check. Savings accounts, checking accounts, money market accounts, and CDs are examples of federally insured bank accounts.
Where do I move money before stock market crash? ›
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 is the safest place to put your money in the stock market? ›
In order to make the most of your money while keeping it pretty safe, here are some smart places to start.
- US Treasuries. ...
- Municipal Bonds. ...
- Stock Market Index Funds. ...
- Long-Term Equities.
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.
What is the safest fund during a market crash? ›
- Federal Bond Funds. Several types of bond funds are particularly popular with risk-averse investors. ...
- Municipal Bond Funds. Next on the list are municipal bond funds. ...
- Taxable Corporate Funds. ...
- Money Market Funds. ...
- Dividend Funds. ...
- Utilities Mutual Funds. ...
- Large-Cap Funds. ...
- Hedge and Other Funds.
While many experts are making predictions about whether the market will crash in 2024 or how severe the next downturn will be, it's impossible to say with certainty where stock prices will be in the short term. However, the market's long-term performance is all but guaranteed to be positive.
Where is the safest place to put your money during a recession? ›
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Can you permanently lose money in stocks? ›
Otherwise known as investment risk, permanent loss of capital is the risk that you might lose some or all of your original investment, if the price falls and you sell for less than you paid to buy.
Do I owe money if stock goes negative? ›
If a stock goes negative, do you owe money? If you do not use borrowed money, you will never owe money with your stock investments. Stocks can only drop to $0.00 per share, meaning you can lose 100% of your investment but not more than that, seeing as the stock cannot be of negative value.
Can a stock come back from zero? ›
Yes, it is possible for a stock to recover from zero.
What happens to money market funds if the market crashes? ›
Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.
How much money disappeared during the stock market crash? ›
Prices plummeted throughout the day, eventually leading to a complete stock market crash. The financial outcome of the crash was devastating. Between September 1 and November 30, 1929, the stock market lost over one-half its value, dropping from $64 billion to approximately $30 billion.
What happens to money when the economy crashes? ›
Bank holidays, conversion or confiscation of accounts and new currency. During severe financial crises, sometimes governments close banks. Depositors may be unable to withdraw their money for long periods, as was true in the United States in 1933 under the Emergency Banking Act. Withdrawals may be limited.
Who loses money when the stock market crashes? ›
Investors who experience a crash can lose money if they sell their positions, instead of waiting it out for a rise. Those who have purchased stock on margin may be forced to liquidate at a loss due to margin calls.
