Editor's Note: This story originally appeared on The Penny Hoarder.
Little more than a year ago, the stock market was crashing, and who can honestly say they weren’t panicked? A stock market crash is anxiety-inducing enough during normal times, even when you don’t have a pandemic, lockdowns and record job losses in the mix.
The 2020 market meltdown began March 9. The bloodbath continued for an agonizing two weeks. By the time stocks hit bottom on March 23, 2020, the S&P 500 index had lost nearly a third of its value.
Some economists predicted the stock market would take three years to recover. Instead, stocks took 181 days to return to their pre-pandemic highs.
Now that we have some hindsight, let’s reflect on the lessons from the gut-wrenching 2020 stock market crash that still hit home one year later.
1. The stock market doesn’t reflect the economy.
The stock market fully recovered to pre-pandemic levels by August 2020. Yet unemployment remained stubbornly high. COVID-19 shutdowns were hammering small businesses.
The big lesson: The stock market doesn’t reflect the economy. It doesn’t tell us anything about the struggles of small businesses or the droves of unemployed people who can’t afford their bills.
What the stock market tells us is whether investors are optimistic or pessimistic. Over the past year, they’ve been mostly optimistic.
They believed the effects of COVID-19 would be relatively short-lived. Some stocks soared precisely because of the pandemic. Investors rushed to invest in companies like Zoom, Home Depot and Peloton that stood to benefit from people being stuck at home.
2. You only lose money in a crash when you sell.
You didn’t lose money during the 2020 market meltdown if you didn’t sell in a panic during the 2020 market meltdown.
It may seem obvious in retrospect. But it’s worth repeating for the next time the market tanks and you can’t stop obsessively monitoring your retirement accounts.
Had you invested $10,000 in an S&P 500 index fund on Jan. 2, 2020, your investment would have been worth just $6,876 on March 23, 2020, the day stocks bottomed out. But if you’d stayed calm and kept your money invested, you’d have far more today.
3. You’ll miss the best days if you try to avoid the worst ones.
If you sell after a market crash, you risk missing the best days. A JP Morgan Chase study found that seven of the stock market’s best days between January 2000 and April 2020 occurred within two weeks of the worst days.
Missing the best days is a way bigger disaster for your investments than experiencing a few more bad days. That same JP Morgan Chase study found that if you’d invested $10,000 in the S&P 500 at the start of 2000 and kept it there, you would have had $32,421 by the end of 2019. But had you missed the 10 best days, you’d have less than half that — $16,180.
4. A stock market crash can be a huge opportunity.
When you can afford to invest, a stock market crash can be like a Black Friday sale for investors. If you had psychic powers and invested $10,000 on March 23, 2020, knowing that would be the day the market would hit its low point, you’d have more than $17,000 today.
The problem, of course, is that you don’t have a crystal ball. When you invest after a stock market crash, you have to be prepared for the possibility that the market could tank even further. But that doesn’t matter if you’re investing for the long term.
One approach some investors take is to practice dollar-cost averaging, which means you invest on a regular schedule no matter what’s happening in the stock market. But they set aside extra cash so that if the market heads south, they can invest more at low prices.
5. FOMO is a real fear.
Plenty of people weren’t scared off by the stock market crash. Instead, the crash exposed a different kind of fear: FOMO, or fear of missing out. Last year, stock trading apps like Robinhood saw a huge spike in activity when the first round of stimulus checks went out after the market crashed.
While investing after a crash is often a great opportunity, some investments are too risky. These include investing in companies that just declared bankruptcy, day trading and penny stocks — all of which have surged since last year’s crash.
6. Recoveries are inevitable. We just don’t know when.
The stock market has recovered from every single crash in history. The trouble is that we never know when that recovery will happen. The 2020 recovery that happened in 181 days was the fastest on record.
By comparison, it took 1,997 days for the S&P 500 to recover from the pre-Great Recession high that it reached on Oct. 9, 2007. It wasn’t until March 28, 2013, that stocks would fully recover.
7. An emergency fund is the best investment you can have.
The biggest lesson of the 2020 stock market crash and recession is just how vital an emergency fund is. Saving for a rainy day isn’t nearly as sexy as picking a stock at a rock-bottom price and watching it soar.
Your emergency fund may not earn you the bragging rights you get from picking a winning stock. But it safeguards the investments you already have, because you can turn to your savings rather than cashing out if you lose your job or have a big expense after the market crashes. Peace of mind and security matter more than bragging rights.
Focus on your emergency fund regardless of what’s happening in the stock market. Once your savings is in good shape, you can afford to use a crash as an opportunity to invest more if that’s what you want.
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