5 Reasons Not to Worry About a Stock Market Crash

The stock market will crash again. When exactly it will happen is beyond my powers of prognostication, but the fact that it will happen at some point is about as close to a certainty as you can get in investing. If you’re worried about it happening and the effect it will have on your family, you’re not alone. You should take that worry as a sign that you’re not adequately prepared to handle the impact a crash will have on your finances and plans.

With the right plan, financial structure, and perspective in place, a mere market crash is nothing to worry about. As long as capitalism itself remains intact, market crashes often bring with them seeds of their own rebirth — such as how the bursting dot.com bubble laid the foundations for today’s Internet titans. The key for investors is to recognize that’s how the market operates and be prepared in advance. With that in mind, here are five reasons not to worry about a stock market crash.

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1. You don’t need your invested money right away

Precisely because the market can crash, money you need to spend in the next few years should not be invested in stocks. The last thing you want to have happen is to be forced to sell more shares than you intended in order to cover a bill you have due. If that happens to you, you’ll find you have less money participating in any recovery that follows, thus reducing the wealth you wind up with.

Instead, money you need in the next few years should be held in a savings or money market account, CDs, or a duration-matched Treasury or investment-grade bond ladder. You won’t earn high returns on that money, but you’ll have a much higher chance that the money you need will be there when you need it. Knowing the money you need is there when you need it is a great way to ride out a market swoon.

2. You’re not leveraging margin

In strong markets, leveraging margin can magnify your returns and make you feel like an investing genius. When things turn sour, however, that magnification effect works against you. Not only that, but your broker also has the right to change the terms of your margin agreement at any time for any reason. Often, that translates to making it more restrictive during a falling market, which would make any margin challenges you find yourself with even bigger problems than they already would have been.

If you’re not using margin, then no matter what the market does, you can’t be forced out of your position just due to falling share prices. That makes it far easier for you to both make it through the crash and stay invested as the market turns back upward.

3. You’ve got a little socked away, just in case

One of the challenges you may face when the market crashes is that often, there’s a good economic reason driving the market downwards. After all,…