Worried About a Stock Market Crash This Year? Don't Try Timing the Market, Do This Instead
Key Points
Timing the market is both risky and difficult to do.
Averaging down can be a much more practical strategy for long-term investors.
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A big mistake many investors make is trying to time the market. Get in at the right time and get out before things get bad. It sounds simple enough, but actually executing it is far easier said than done. The market can be incredibly unpredictable. This time last year was a good example of that, when reciprocal tariffs rattled the S&P 500 (SNPINDEX: ^GSPC), only for the index to end up soaring afterward.
Nowadays, investors remain concerned about the potential for a market crash. Oil prices are soaring, fears of inflation are elevated, and there's even the possibility that interest rates may end up rising, at least temporarily. On top of all that, there's a war in Iran. There are plenty of reasons to be worried about the stock market these days.
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However, getting out of the market and waiting for a better time to buy back in may not be the best option. Instead, what you may want to consider is averaging down if your investments fall in value.
Image source: Getty Images.
Why averaging down can be a great strategy for long-term investors
If the market does end up crashing this year, then your best bet may simply be to buy more shares of the companies you've invested in. As prices come down in value and you buy more, your average cost comes down, which can set you up for greater potential returns in the long run.
This can be a suitable strategy to deploy for the long term because it allows you to stay invested in the stock market. And if there isn't a crash in the market, well then that's great because it might mean your investments go up in value and you don't have any regrets about selling. But if it does crash, the stocks you own would technically become more attractive buys at lower prices. As long as nothing has fundamentally changed with the stocks themselves or their earnings potential, buying more shares and averaging down can be an excellent move.
The key is to only average down on quality, blue chip stocks
Averaging down works well if you are investing more in stocks that are generally safe investments to begin with. If speculative stocks and meme stocks crash, there may not be as much reason to expect a recovery from those types of investments as there will be from safer, blue chip stocks. That's why, before you average down, it's important to ensure any stock you want to buy more of has strong fundamentals and promising growth prospects.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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