Lack of knowledge drives fear when the stock market crashes | INVESTED MOM
The stock market has been around for decades, yet a large percentage of North Americans do not invest, especially when the stock market crashes.
The stock market has been around for centuries, yet a surprisingly large percentage of North Americans do not invest. There are many reasons why people may choose to avoid the stock market, however, there are also many good reasons to invest in stocks, including the potential to generate income, build generational wealth, and hedge against inflation The fear of stock market crashes can interfere with building your wealth over the long term.
While there is no guaranteed way to make money in the stock market, investors who take the time to educate themselves and develop a disciplined investment strategy can increase their odds of success. For these reasons, it may be beneficial for more people to consider investing in the stock market and worry less about stock market crashes.
The 3 most common reasons why people avoid investing when the stock market crashes
Fear of losing money and a stock market crash
Lack of knowledge about stock prices and how the market works
Lack of trust in financial professionals and institutions
A history lesson on stock market crashes:
The stock market crash of 1929 was arguably the most shocking stock market crash in the history of the United States of America. It occurred on October 29, 1929, and wiped out billions of dollars of wealth in one single day. The effects of the crash were felt worldwide, and it ultimately led to the Great Depression.
Here are some more examples of historical stock market crashes. They include the 1987 October stock market crash, 1999-2000 Tech Bubble, 2008 Great recession as a result of the financial and housing bubble, and the 2020 COVID-19 stock market crash.
A stock market crash happens when the market enters an unstable phase, and economic fear and turmoil causes share prices to fall suddenly and unexpectedly. Following a stock market crash, panic trading can be prevented by curtailed economic activity. As a result of the stock market crash of 1929, economists – including the leaders of the Federal Reserve – learned a few important lessons: Central banks – including the Federal Reserve – should be careful when acting in response to equity markets. Detecting and deflating financial bubbles is difficult. Using monetary policy to prick asset bubbles risks severe economic damage.
Whilst stock market crashes are often associated with economic downturns, it’s important to remember that they can also occur during periods of economic growth. For example, the 1987 stock market crash happened when the US economy was in the midst of a strong expansionary phase.
When the stock market crashes, it can be incredibly confusing and frightening for those who do not understand how it works. A lack of knowledge can also lead to making poor investment choices like panic selling when there is a sudden drop in stock prices.
The best way to combat this fear is to educate yourself about how the stock market works. There are several resources available that can help you learn about the basics of investing. Check out my 10-Step Guide to a financially Free Life to get you started. It's packed with resources and book recommendations. Once you have a basic understanding of how the stock market works, you will be less likely to be afraid of a market decline and stock market crash.
Another common reason why people do not invest in the stock market is a lack of trust in financial professionals and financial institutions. This mistrust can be caused by a number of factors, including the 2008 financial crisis and the housing bubble aka The Great Recession. When you entrust your money to someone else, you want to be sure that they will use it wisely.
You should also make sure that you are working with reputable and trustworthy financial professionals. Research any financial professional that you are considering working with to make sure that they have a good reputation and past performance. Only work with financial professionals that you trust.
Finally, remember that you are in control of your own money. You can choose to invest it in the stock market or not. If you do choose to invest in the stock market, remember to educate yourself about how it works and only work with financial professionals that you trust. Do not let fear drive your decisions.
Related reading: How to Build Wealth when you don't know where to start.
The stock market has been around for centuries and has provided people with the opportunity to grow their wealth. Don't let a lack of knowledge or trust keep you from taking advantage of this opportunity. Educate yourself about how the stock market works and make informed decisions about where to invest your money.
Fear stems from a lack of knowledge about the stock market.
If you're just beginning your journey into the stock market, fear is a natural reaction. The market is an ever-changing entity that can be intimidating and overwhelming to those who don’t fully understand it. However, it's important to know that investing in the stock market doesn't have to be scary or complicated—in fact, it can be done by anyone who has a desire to learn and grow.
Individual investors or individual traders can have their own self-directed account and manage their own money. If you can get even a basic understanding of underlying economic factors that influence stock markets, you can take advantage of market downturns during an economic crisis. I talk more about it here: Are We In A Recession? What Can We Do?
Stock market crashes are normal and happen every few years when stock prices drop.
The stock market has been going up for the last 100 years, and it’s almost guaranteed to continue going up over the long term. However, there will be times when the market dips, especially after a prolonged time of rising stock prices and excessive economic optimism —this is normal and to be expected. These downturns are typically caused by short-term factors such as economic or political turmoil, or even a world war. A stock market correction doesn't necessarily mean that the stock market is in danger of crashing, and they shouldn’t deter you from investing.
In fact, stock market crashes can actually present opportunities to invest at lower prices. So, if you’re feeling scared about investing during a market crash, remember that it could be a good time to buy stocks on sale. You can get your favorite companies at a margin of safety price.
The bottom line is this: don’t let fear drive your investment decisions. Instead, educate yourself about the stock market Stock market crashes are normal and part of investing in stocks and equities.
Stock market lingo:
Bear markets are a normal occurrence that happen every few years. They usually last about 6-18 months and dip anywhere from 12% to 20%.
Corrections are shorter and less severe than bear markets. They can last anywhere from a month or two to several months, depending on how quickly stocks bounce back after hitting their lows (and/or if they recover at all).
A bull market is the opposite of a bear market, where stocks are on the rise. They can last for years and see prices increase by as much as 30% or more in a year and can often exceed long term averages in some years.
In general, it’s best to stay invested in the stock market during both bull and bear markets with anti-fragile companies in your portfolio. However, you may want to consider making some changes to your portfolio to have a decent amount of cash on hand, ready to deploy when prices become attractive.
It’s also important to remember that stock prices can rebound quickly after a crash. So, even if the market takes a hit, don’t panic and sell all of your stocks—you may miss out on a rebound.
The stock market has been around for centuries and has provided people with the opportunity to grow their wealth. Don't let a lack of knowledge or trust keep you from taking advantage of this opportunity. Educate yourself about how the stock market works and make informed decisions about where to invest your money.
While it can be difficult to watch the stock market tumble, it’s important to remember that crashes are a normal part of investing. They provide opportunities to buy stocks at lower prices, and the market always has the potential to rebound. So, don’t let fear drive your investment decisions— educate yourself about how the stock market works and make informed decisions about where to invest your money.
Related reading: How to create Generational Wealth.
If you’re still feeling scared about investing in the stock market, that’s OK. Start small and gradually increase your investment over time. And remember, you can always consult with a financial advisor to get help creating an investment plan that meets your needs and goals. You can also join my Monthly Investing for Invested Moms Membership which is filled with amazing tools and education to get you started on your investing journey.
When we think about stocks, it’s natural to worry about losing money. After all, stocks are volatile—they go up and down from day to day or even hour to hour. But while stock prices may fluctuate in the short term, they have historically trended upward over the long term.
By selling in a panic during a crash, you are locking in losses and will miss out on gains moving forward.
The stock market is not a casino. It does not pay out a jackpot or provide you with immediate gratification. You cannot win by playing for just one day or week, and it's not a short-term game; the market moves in cycles that last years, so if you're thinking about investing for retirement purposes, expect to wait a while before seeing your money grow into something substantial.
In order to make gains on the market, you have to hold onto your stocks for years at a time—and even then, there will be ups and downs along the way (like we've seen lately). If all of this seems too risky and uncertain for you—or if losing money makes you feel physically ill—then maybe investing isn't right for your needs. But if being patient sounds like something that fits into your lifestyle more easily than short-term schemes do, then stick with it: long-term growth is possible!
Invest in companies you can understand, and buy them with a margin of safety when they're on sale!
The best time to buy into the stock market is when others are fearful and selling.
The best time to buy into the stock market is when others are fearful and selling. Warren Buffett famously said:
“Be fearful when others are greedy, and greedy when others are fearful.”
When there's turmoil in the market, prices tend to get cheaper. This makes sense because most people don't want to buy anything when they think it's going down (or they're just too scared). So they sell their stocks at higher prices than they would have had if everyone thought it was going up again soon. Buying when others are fearful can be rewarding because you'll benefit as soon as things turn around again and everyone realizes that their fears were unfounded or overdone in the first place!
Also, when people are selling a lot of their stocks at once, then companies sometimes give employees bonuses and raises just so that those employees won't start wanting to leave and go work somewhere else where things aren't so scary for them anymore (and also so that those employees will keep buying more stuff from the companies). That means more money in your pocket—so great news for investors!
The majority of people who avoid investing out of fear would be better off taking the plunge and investing with a buy-and-hold strategy rather than trying to time the market.
The stock market can be a risky place if you lack the knowledge on how to invest or you've decided just to be a passive investor. Over the years, there have been a number of stock market crashes that have wiped out the savings of millions of people. So, how can you protect yourself from these crashes?
One strategy is to invest in stocks that are "buy and hold" stocks. These are stocks that are unlikely to be affected by stock market crashes, meaning they're anti-fragile. Instead, they tend to slowly and steadily increase in value over time. This means that, even if there is a stock market crash, your buy-and-hold stocks will likely not be affected. As a result, you can rest assured knowing that your investment is safe.
The stock market will go up and down over time. But, in the long term, it's a safe place to invest your money.
There's no one perfect time to buy into the stock market. The key is to have a long-term outlook and to be comfortable with the ups and downs that come with investing.
If you're still not sure whether investing is right for you, talk to a financial advisor. They can help you understand the risks involved and develop a plan that meets your financial goals. You can also join the waitlist for a 1:1 strategy coaching call.
Don't try to time the market by selling and buying at the wrong times. Instead, buy stocks of companies (or other investments) that you are capable of understanding for the long haul and then let them sit there and compound. When other investors get scared about what might happen in the future, they'll sell their stocks--and that's when you should be buying more of them!
You don't need to be an expert investor or even have much knowledge about investing in order to make money from investing in stocks; just do it slowly over time with regular contributions from your paycheck and use those contributions as consistently as possible until you reach retirement age--then let your investments grow while you enjoy retirement!
Related Reading: The Retirement Lie: You're never going to save your way to retirement