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S&P 500 Slump: What Does It Mean for Your Investments?

by Eusebiu Cioroaba 2 months ago in stocks
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What should you do to protect your money?

What should you do to protect your money?

The Standard and Poor's 500, or simply the S&P 500,[5] is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of December 31, 2020, more than $5.4 trillion was invested in assets tied to the performance of the index.

The S&P 500 index is a free-float weighted/capitalization-weighted index. As of September 30, 2021, the nine largest companies on the list of S&P 500 companies accounted for 28.1% of the market capitalization of the index and were, in order of weighting, Apple, Microsoft, Alphabet (including both class A & C shares), Amazon.com, Meta Platforms, Tesla, Nvidia, Berkshire Hathaway and JPMorgan Chase. The components that have increased their dividends in 25 consecutive years are known as the S&P 500 Dividend Aristocrats.

The stock market has had a rough few months, and many investors are wondering what this might mean for their portfolios.

The S&P 500 is down more than 17% since the beginning of the year. This puts it firmly in correction territory (which involves a drop of more than 10%), and inches it closer to a bear market (a decline of more than 20%).

While there's no simple answer as to when this downturn will end or how much further stock prices will fall, there are ways to prepare. Here's what this slump could mean for your investments.

It could get worse, but it will get better eventually

Nobody knows how the market will perform in the coming weeks and months, and that uncertainty can be daunting. There is also a chance we haven't seen the worst of this downturn, and stock prices could continue plummeting.

However, the market's long-term performance is much more certain. The S&P 500 has faced many corrections and crashes over the decades, and it's managed to recover from every single one of them.

In the past 20 years alone, the market has experienced everything from the dot-com bubble burst to the Great Recession to the crash in the early stages of the COVID-19 pandemic -- along with countless smaller downturns along the way. Despite everything, it still earned positive average returns.

Past performance is not always indicative of future returns when it comes to the stock market. But there is an extremely strong chance that the S&P 500 will recover from this downturn as well, given enough time.

What should you do right now?

When the market is in a slump, it's normal to feel like you need to do something to protect your investments. However, oftentimes the best thing you can do is nothing at all: Simply sit tight and hold your investments until the market recovers.

In the near term, your investments will likely lose value if stock prices drop. But keep in mind you don't actually lose any money unless you sell. By holding your investments for the long term, you'll eventually see your portfolio bounce back once the market inevitably recovers.

It's critical, though, to ensure you have the right investments. Not all stocks can survive periods of market volatility, but strong stocks from healthy companies have the best chance of pulling through. By ensuring every stock in your portfolio is a solid long-term investment, it's far more likely your investments will recover from a downturn.

The key to surviving volatility

Maintaining a long-term outlook will make it far easier to tolerate a market downturn. Even if stock prices fall further, keep in mind that historically, the market has a 100% success rate when it comes to recovering from slumps.

When you have a strong portfolio, there's a very good chance your investments will survive. By choosing the right investments and keeping a long-term outlook, you can rest easier regardless of what happens with the market.

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Eusebiu Cioroaba

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