What You Can Learn From the Worst “Market Crashes” in Recent History

If you’ve spent any time consuming financial media, you know pundits love using exaggeration and hyperbole. For example, if the S&P 500 drops two percent in one day, it might be described as “plummeting” or even “crashing.”

While a two percent decline in a single day is a fairly unusual event, it’s not especially dire in the grand scheme of things.

By comparison, if you were in an airliner flying at 30,000 feet and the plane lost two percent of its altitude, you would descend only 600 feet. If the pilot made this change in altitude over a few minutes, you might not even notice.

“Crash” is a loaded word. If you hear about a car crashing into a telephone pole, you might reasonably assume that the vehicle is no longer drivable. But when there’s a “market crash,” it means that the short-term value of a group of equities has declined by an unusual amount. The short-term decline in value is certainly concerning, but the market hasn’t actually crashed into anything. You can reasonably assume that, unlike the crashed car, the market will continue to operate on the next trading day.

Emily Fredlick did an analysis of stock market “crashes” over the past 150 years and came away with several conclusions.1

They occur fairly regularly. From the 1870s onward, the market has experienced major contractions about once a decade.
It’s impossible to predict how long a stock market recovery will take. The recovery after the dot-com bubble burst took years. But the recovery after the COVID correction took only four months.
If you don’t panic and sell your stock holding when the market crashes, you will be rewarded in the long run.
Fredlick acknowledges that for investors living through these downturns, it can seem like the end of the world. But things always get better.

“Market crashes always feel scary when they happen,” she writes. “Still, even if you are looking down the barrel of the next Great Depression, history shows us that the market eventually recovers.”

This is good advice and remembering it can help settle feelings of panic next time the financial pundits declare that the sky is falling.

Knowing that periods of unexpected volatility are simply part of the price you pay for participating in the market, the prudent investor will work with his or her trusted advisor to maintain a truly diverse portfolio designed to navigate dramatic ups and downs. And they will maintain their focus on the one thing they can always control, which is their own disciplined behavior.