Experienced investors know that there’s always background noise in the market claiming ‘the big one’ is coming. We hear all the time that a stock market crash is coming, comparable to The Great Depression in 1929, or the great financial crisis in 2008. But is that really what investors should be thinking about?
Admittedly, there is probably a lot more uncertainty for investors than in recent times. Inflation, interest rates, war in Europe, upcoming elections, the list is almost endless. There is plenty that could spark the next stock market crash, including an escalation in conflict, a mistake from central banks in tackling inflation, and many more.
However, for investors with many decades ahead in the market, these short-term periods where markets drop should be seen as opportunities. By developing an understanding of how to balance a portfolio and manage risk, long-term investors can afford to ignore volatility, and have confidence that the market is the right place to be.
Playing the long game
There is definitely more fear than usual in the market today. The infamous Fear & Greed Index is currently in the ‘Extreme Fear’ category for the US’s top 500 companies, known as the S&P 500. This represents levels of fear unseen since last October. This makes a lot of sense, since even the most sophisticated of investors don’t know what is next.
However, it’s worth noting that although there is fear in the market, 2023 has still been a very solid year for investors. Although August and September have been difficult, this is roughly in-line with the historical seasonality of the market, so shouldn’t be a huge surprise.
For most investors, these bumps in the road should be a buying opportunity for the coming years. There’s always bad news in the market if investors listen for it, and whether there is a stock market crash coming soon, history shows us that the market has always bounced back in time.
The stock market has experienced a drop of more than 10% every 1.2 years since 1980. These are never enjoyable, but are simply part of investing.
Looking at the history of stock market crashes, there have been 12 occasions where the S&P 500 has dropped by more than 20% since 1950. These usually last about a year, and average at 33.3% in overall decline. Sounds scary, but looking at the overall trend, it becomes hard to even see where most of these were!
The same can be seen for the FTSE 100, which despite having a rocky 2023, has presented great value for investors over decades.
The next stock market crash
So to answer, the question of whether there is a stock market crash coming, yes!
It doesn’t need to be this year, but history shows us that it’ll happen again. However, this isn’t a reason to avoid investing, or to change our strategy. Being aware that it will happen, and that things will be okay, is our biggest weapon against mistakes. My strategy is to buy quality companies at great prices, hold them for years, and keep cash ready to buy shares regularly along the way.
So whatever causes the next stock market crash, by building a strategy which can thrive through good times and bad in the market, there’s nothing to worry about!