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.
Where does money go when the stock market crashes? ›
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.
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.
How do I protect my portfolio from a market crash? ›
Build a well-diversified portfolio
Spreading your money across a range of asset classes, including shares, bonds and cash, can help to reduce volatility in your portfolio. As well as including different asset classes in your portfolio, you could also diversify by sector.
What bank is the safest to put your money in? ›
JPMorgan Chase, the financial institution that owns Chase Bank, topped our experts' list because it's designated as the world's most systemically important bank on the 2023 G-SIB list. This designation means it has the highest loss absorbency requirements of any bank, providing more protection against financial crisis.
Can the bank take your money if the stock market crashes? ›
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
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.
Do you lose all your money if the stock market crashes? ›
Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.
Can I lose my IRA if the market crashes? ›
A recession could result in a lower IRA balance, but that's not guaranteed to happen. If a recession does negatively impact your IRA, your best bet is to do nothing. It's a good idea to have an emergency fund for surprise expenses that could pop up during a recession, so you can let your IRA recover.
Do you owe money if a stock goes negative? ›
A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
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.
Where is the safest place to put your retirement money? ›
Certificates of deposit (CDs) are a very safe place for your retirement money. For starters, they are FDIC insured (as long as you take them out from an FDIC member bank), so your money is protected up to $250,000 per account holder per bank. CDs are also a good option for earning a high annual percentage yield (APY).
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.
Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.
Where do you put your money before a 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.
