The stock market has soared in recent years, with the S&P 500 up by more than 55% since its lowest point in late 2022.
But stock prices can't keep surging forever, and there will be a pullback sooner or later. Around 26% of investors are feeling pessimistic about where the market will be six months from now, according to a July 2024 survey from the American Association of Individual Investors. Some experts are also predicting that a downturn is looming, which has rattled many investors.
While the market's future may be uncertain, there's a silver lining: It doesn't necessarily matter what stock prices do over the coming weeks, months, or even the next year. Here's why.
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The stock market's secret weapon
The stock market often experiences wild fluctuations in the short term, and while that can be unnerving, it's normal. Despite those ups and downs, though, the market's long-term performance is incredibly consistent -- and positive.
Time is the stock market's superpower, and if you stay invested long enough, you're all but guaranteed to see positive total returns. Even if the market experiences a significant downturn in the coming months, it will inevitably recover eventually. All you need to do is stick it out until stock prices rebound.
For example, in the last two decades alone, the market has faced some of the most severe crashes and recessions in history -- including the dot-com bubble burst, the Great Recession, the COVID-19 crash, and the most recent slump throughout 2022.
Say that you invested in an S&P 500 index fund in January 2000, shortly before the index entered one of the longest bear markets in history. The following few years would have been rough, but if you simply held your investment without selling, you'd have earned total returns of nearly 277% by today.
With a buy-and-hold approach, the market's fluctuations won't have as much of an impact on your long-term savings. Rather than getting caught up in what the market will do in the coming weeks or months, then, you're better off staying focused on your portfolio's long-term potential.
Give your portfolio the best chance of survival
There is a big caveat to the long-term investing approach: You'll need to choose the right investments.
Some stocks may thrive in the short term when the market is booming, but they'll struggle to survive downturns. Even strong stocks can be hit hard during periods of market volatility, so it can be tough to determine which investments will perform well over time.
To ensure you're choosing the best stocks, it's wise to look beyond market performance and instead dig into the company's underlying business fundamentals.
If a company is healthy at its core, it's more likely to survive even the worst downturns. But if a business is showing any red flags -- like, for example, if it struggles to maintain a competitive advantage in its industry or its leadership team is consistently making questionable decisions -- it may have a tougher time recovering from slumps.
Doing your due diligence is key to surviving any market downturn. Nobody can say for certain whether a crash is coming in 2024, but by investing in the right places and keeping a long-term outlook, you can ensure you're prepared for whatever may be on the horizon.
