The stock market, as measured by the S&P 500, has been on a tear in recent years, up 21.8% in 2017, 31.5% in 2019, 18.4% in 2020, and 27.2% as of this writing in 2021. (There was one down year, 2018, when the index slipped -- but only by 4.4%.) The S&P 500 averages about 10% annual growth over long periods, so these are clearly bullish years.
It's very reasonable, then, to wonder whether the market will crash sometime soon and possibly crash hard. If you're wondering whether it makes sense to be buying stocks now, my answer would be yes. Read on for three reasons why.
Image source: Getty Images.
1. The market could keep surging
One reason to not pause your stock buying is that the market may still post another year or two or three of growth, and you'd be stuck on the sidelines. Let's take a closer look at S&P 500 returns in recent years:
|
Year |
S&P 500 Return |
|---|---|
|
2008 |
(37%) |
|
2009 |
26.5% |
|
2010 |
15.1% |
|
2011 |
2.1% |
|
2012 |
16% |
|
2013 |
32.4% |
|
2014 |
13.7% |
|
2015 |
1.4% |
|
2016 |
12% |
|
2017 |
21.8% |
|
2018 |
(4.4%) |
|
2019 |
31.5% |
|
2020 |
18.4% |
|
2021 |
27.2%* |
Source: Slickcharts.com. Returns reflect reinvested dividends.
*Year to date as of Dec. 13, 2021.
Imagine it's 2012 or 2020, and you're wondering whether you should steer clear of the stock market. You'd be aware of multiple years of strong growth, worrying about a crash. But look what happens after those years: more gains. There's no guarantee, of course, for any particular year, but know these things:
- The market can go up or down slightly or sharply in any year.
- Despite many occasional downturns, the market has kept rising over the long run.
- Every downturn has been followed by a recovery and new highs.
Since there are occasional (and inevitable) stock market crashes and corrections, it's best to not invest in stocks with any money you'll need for at least five years (if not 10, to be more conservative). But with long-term money, stocks are many people's best path to wealth-building. Even if you invest right before a crash, your long-term dollars should have time to recover and grow.
By the way, an excellent way to invest in the overall stock market easily and quickly is via an index fund, such as one that tracks the S&P 500.
Image source: Getty Images.
2. There are still undervalued stocks available
While it's rarely smart to stay out of the stock market due to worries about crashes, it can be smart to stay away from certain stocks. At any given time, there will be plenty of stocks in the market that have surged to values far above their intrinsic values, given their expected growth -- and plenty of stocks that are undervalued.
For best results, aim to only buy stocks when they seem undervalued because overvalued stocks could fall back to reasonable valuations at some point before advancing again. Value investors, who count among their ranks super investors such as Warren Buffett, always seek undervalued stocks -- ones that offer a margin of safety.
That doesn't mean you have to avoid growth stocks, which often seem overvalued, but do take their valuation into account and remember that some will be more undervalued than others. For best results with growth stocks, you might follow The Motley Fool's investing philosophy, buying 25 or more stocks and aiming to hold them for at least five years. That can give even overvalued stocks a reasonable chance to grow into and beyond their intrinsic values.
3. The market may have crashed by the time you read this
Finally, another reason why you might not want to stay out of the stock market is that between the time this article is written and published, it might have crashed! If that's the case, it's likely an especially wonderful time to invest in stocks because most of them will have fallen in value, some to very attractive levels.
Stock market crashes offer great opportunities for investors. Stock prices will be lower, and dividend-paying stocks' dividend yields will be higher (because as a stock price falls, a yield rises, and vice versa).
Don't stay away from the stock market if you're afraid it might crash. Instead, only invest in it with long-term money, and perhaps invest in it gradually. If you park a certain sum in the market every month or few months, you'll be investing when it's up a little and down a little.
