The stock market looks real ugly right now. The last six months have been some of the worst for the stock market in the last decades. The Nasdaq is down by 30%, the S&P 500 by over 20%, and the Dow Jones Industrial Average by 15%. It’s lookin’ like a crash, a recession, an “economic downturn”! Which, uh… isn’t pretty.
That’s why I’m choosing not to look!
Because when I do look, it seems like aaaaall the gains I’ve earned by investing in the stock market have shriveled up like a scrotum on Hoth. It looks, in other words, like I’ve lost a lot of money.
But have I really? When the stock market crashes, do you really lose money?
How investing in the stock market works
To answer this question, we need to run through an extremely basic explanation of how the stock market works. Like, so basic it’s drinking a pumpkin spice latte on the way to get an ombré dye job. Here goes.
You buy a stock when it’s worth X. The hope is that some day it’ll be worth, like, X+100 or more. And at that time, you can sell it for more than you bought it, reaping a nice fat return. The goal is to take more money out of the stock market when you sell than you spent to buy in.
But despite your goals, the value of any stock you own can fluctuate up and down over months and years. To a large degree… that doesn’t matter at all. What matters is the price at which you sell a stock compared to the price at which you bought it. In other words, the starting balance of your investment portfolio compared to the ending balance when you retire (or take money out of the stock market for any other reason).
If you’d prefer an investing lesson that isn’t wearing Uggs and eating a kale salad, check out our Investing Deathmatch series:
- Investing Deathmatch: Managed Funds vs. Index Funds
- Investing Deathmatch: Traditional IRA vs. Roth IRA
- Investing Deathmatch: Paying off Debt vs. Investing in the Stock Market
- Investing Deathmatch: Investing in the Stock Market vs. Just… Not
- Investing Deathmatch: Stocks vs. Bonds
- Investing Deathmatch: Timing the Market vs. Time IN the Market
And if you’re not yet invested in the stock market, worry not! It doesn’t even take a lot of money to get started. Consider using our sponsor, Acorns:
If you sign up with the button above, we get paid! Which is pretty neat because I have it on good authority that our assistant’s landlord does not accept rent in the form of Exposure Bucks.
The once and future stock market
Behold this very fancy chart from my business zaddy, The Motley Fool:
This chart shows the S&P 500 stock market index and its value over time (the DJIA and the Nasdaq run similar courses, but I chose not to include them because again, we’re being basic as a Sex and the City marathon).
For all my baby bitchlings out there who just went “huh??” I’ll translate: this is how much money all the stocks in the stock market are collectively worth over the last century or so. When the line goes up, that’s a good thing. The gray columns represent recessions.
You should notice two things:
- Even when the line temporarily dips down… it always goes back up.
- Recessions happen all the damn time.
What this data shows is that even when the shit hits the fan—Black Monday, the Dot Com Bubble, the 2008 Recession—the stock market always recovers. The values of most stocks, in the aggregate, go back up even when they temporarily go down. This is partly due to economic growth in the grand sense of the term, and partly due to a bunch of other stuff I’m too lazy to explain right now.
If you want to learn more about economic cycles, we got you:
- Booms, Busts, Bubbles, and Beanie Babies: How Economic Cycles Work
- A Brief History of the 2008 Crash and Recession: We Were All So Fucked
So did I just lose money in the stock market or not???
Let’s Socratic Method this thing!
- Did you invest money in the stock market some time in the past?
- If so, have you held onto your stocks instead of selling them?
- And do you plan to continue holding and not selling for the near future?
If you answered yes to the above questions, then technically, you did not lose money in the stock market during the current downturn. It may look like you lost money on paper, but trust me… you didn’t. Not technically, and not even practically.
But the balance on my investment portfolio went down…
I did not generate that fancy chart up there for my own health! Remember that the stock market fluctuates constantly. The value of individual stocks and of larger units like index funds and ETFs will go up and down and up and down again. It never stays completely flat. Otherwise what would be the point of investing?
So as long as you keep your money invested, it is not lost. It is only lost (or increased!) when you remove your money from the stock market. Sell your investments when their value is lower than when you purchased them and you will lose money in the stock market. Do nothing when the value is lower than when you bought them and… nothing happens. You’re pretty much fine.
In fact, if you do nothing except keep your money invested, you have a chance to gain even more money than you started with. All you have to do is sit tight and wait out the crash.
Of course, there are some important exceptions…
Not all stocks recover
In a stock market crash, not all stocks recover. Some companies go out of business, making their stocks worthless.
This is why we don’t really think you should purchase individual stocks as an average investor. You should put your money in index funds and similar vehicles that track the entire market. That way, if a handful of companies fold, you won’t even feel it. Because (see above) the wider market historically has always recovered.
When you retire matters
Because we’re advocating long-term investing, that means you should keep most of your money in the stock market during your working years and only pull it out when you retire. But what if you set your retirement date and then the stock market pulls a Snoopy vs. the Red Baron?
If you retire when the market is crashing, then yeah, you’ll probably lose money. There are things you can do to mitigate that risk—reallocating your funds as you get close to retirement to lessen your risk, working longer, investing in dividend stocks—all of which is a lesson for another day.
Buying on margin
Investors can still lose money when the stock market crashes if they use an investment strategy called buying on margin.
This isn’t something brand new baby investors need to fuck with, but it basically involves borrowing money in order to invest. You split the returns with the lender and both lender and borrower profit (another basic oversimplification, but I’ve got a point to make in fewer than 5,000 words here, people). So if the market crashes, you won’t have any returns to split with the lender. And in technical terms, that leaves you up a creek without a paddle.
Out of control inflation
Ah inflation. Should’ve known that old motherfucker would have something to do with this.
When the rate of inflation outpaces the stock market’s rate of return, investors can lose money. Typically, this happens during hyperinflation. And despite the fact a tank of gas now costs two kidneys and a bone marrow transplant, we’re not actually experiencing hyperinflation right now.
Even so, we do not recommend pulling your money out of the stock market during periods of even high inflation.
I’m here for a long time, not a good time
The stock market is not a fucking game. Which is why I get all grumpy and cantankerous at apps that try to gamify investing by encouraging rapid buying and selling (lookin’ at you, Robinhood). This system is not designed for the average person to get rich by day trading.
Rather, the whole system is designed so that you and I, normal Earth humans, can invest for the long term and eventually profit from the whole exercise. We’re supposed to buy and hold for years at a time, patiently feeding money into the investment monster at regular intervals and waiting for it to poop out compounding returns. It’s not a get-rich-quick machine.
Which is why we don’t ever recommend a practice of rapid buying and selling. You are not the Wolf of Wall Street, my dude. Stick your money in an index fund and sit on it for years. Set it and forget it. If you can, schedule automatic investments and ignore the whole damn thing for months or years at a time.
Not only is this a winning strategy for high long term returns on your investments, but it’ll also save you all the anxiety of frantically watching the value of your stocks go down in real time. Go watch something more entertaining and less stressful. Like Alone!
Buy and hold for the long term and you’ll be fine… probably?
No one knows the future of the stock market. Not the Oracle of Omaha, not Miss Cleo, not my psychic medium of a hair stylist (‘sup girl), and certainly not me. The best we can do—and what I’ve tried to do above—is to rely on historical precedent and best practices to mitigate risk and maximize reward.
That means investing for the long term and not getting panicked by crashes. Follow these methods and you’ll probably be ok! I’m not a professional (I just play one on the internet), but it’s what I’m doing.
Now, did I just put your fears at ease? Do you feel better about all this? Are you going to ignore the stock market and stick with your long-term investing plan? Good. My work here is done. Consider tossing a coin to your Bitches in exchange for this peace of mind:
Ok, Bitch Nation, how are you feeling about the current stock market free-fall? Are you nervously watching the numbers plummet? Are you stonking it to the moon or whatever it is
the kids manchildren are doing these days? Did I oversimplify my basic explanations to the point of inaccuracy? Is your money in your mattress??? Tell us all about it in a comment below.