Nervous about investing? Why the stock market is safer than it looks

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It’s been a tumultuous year for the stock market, with major indices still down sharply from their highs. Combined with the lingering worry about a recession and a potential stock market crash, this can be a trying time to invest.

Amid all this uncertainty, it’s natural to wonder how safe the stock market really is. When your savings are at stake, no one wants to lose money by investing at the wrong time.

While there are legitimate concerns about the market, in the long run it is safer than it looks. Here’s why.

Image source: Getty Images.

Long-term performance is king

Volatility is common in the short term, and even experts cannot predict exactly how the market will behave. It’s possible that a stock market crash is looming and your portfolio will likely temporarily lose value if that happens.

However, short-term ups and downs are not as important as long-term market performance. Regardless of what happens over the next few weeks or months, the market is extremely likely to see positive average returns over time.

In other words, even if the market crashes tomorrow, you can still make a lot of money in the long run.

Case in point: In the past two decades alone, the stock market has seen the dotcom bubble burst, the Great Recession, the March 2020 crash, and countless smaller downturns along the way. Despite everything, however, the S&P500 has increased by nearly 170% since 2000.

^ SPX Chart

^ SPX data by YCharts.

Additionally, the S&P 500 has historically earned an average rate of return of around 10% per year. This means that good and bad years have averaged returns of around 10% per year over the long term.

These returns are significantly higher than what you would get by putting your money in a savings account, which only offers interest rates of around 1% to 2% at best. At this rate, your money isn’t even keeping up with inflation, which means it will lose purchasing power over time.

Risks to consider before investing

The stock market is a wealth generating powerhouse, and investing is one of the most effective ways to grow your savings. But it’s the best solution for those who have at least several years (or ideally a few decades) to leave their money in the market.

Because the stock market can be unpredictable, no one knows exactly how it will perform over the next few months. And if we face a more severe recession or crash, full market recovery could take years.

This is normal, and not necessarily a bad thing. But if you’re nearing retirement or expect to need your savings in a year or two, it may be riskier to invest now. If stock prices fall and you then decide to withdraw your savings, you could end up selling your investments at a loss.

Investing in the stock market can be daunting, especially during volatile times. But in the long run, it’s one of the surest ways to build wealth. By continuing to invest even when the market is unstable, you will reap the rewards later.

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