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In a nutshell
A stock market crash is a steep and sudden decline in the stock market. This is typically measured by sharp declines in major market indexes like the Dow Jones Industrial Average, the S&P 500 and others.
- There is no official definition in terms of the level or duration of market decline that makes a crash (as opposed to a bear market); however, a crash is generally an event that happens over a few hours to a few weeks, whereas a bear market can last for months or years.
- Major stock market crashes include the 1929 crash associated with the Great Depression, the Black Monday crash of 1987, the 2001 crash associated with the bursting of the dotcom bubble, the 2008 arising out of the Financial Crisis and the 2020 crash related to the onset of COVID. These crashes varied in terms of the amount of the market drop and the duration of the down market.
- The 2020 crash only lasted for jut over a month and the markets actually ended the year higher. The bear market of 2022 lasted from January to October of that year.
Seven actions to deal with a stock market crash
There are a number of steps to take to deal with a stock market crash, including being prepared beforehand.
Portfolio diversification
A diversified portfolio can be one of your best defenses against the effects of a stock market crash. Diversification means having the appropriate mix of stocks, bonds, cash and perhaps alternative investments that is aligned with your investing time horizon and your risk tolerance. Even a diversified portfolio will feel the impact of a stock market crash, but proper diversification can help mitigate the impact.
Fine art and other types of alternative assets may have a weak correlation with the performance of the stock market. Platforms like Masterworks allow investors to diversify out of financial securities, which proved to be highly correlated in the last bear market, and into alternatives like fine art without having to pay millions of dollars for a single piece. Other alternative investments include precious metals like gold.
Don’t panic
A stock market crash can be scary. Perhaps the worst thing an investor can do is to panic and sell at the bottom. Instead, assuming you have properly diversified, trust in your long-term strategy, make some adjustments and wait for the inevitable turnaround in the market.
Buy the dip
While it’s not good to try and time the market, if there are solid companies whose stocks you are looking to add to your portfolio, buying them when the markets are at or near their lows can provide solid returns. As things rebound you stand a good chance of making a profit if only due to the fact that you bought these stocks “on the cheap.” This is also something to keep in mind in the course of normal portfolio rebalancing as well. A market crash can be an opportunity to add to your stock allocation.
Dollar cost average during the decline
Instead of trying to time the absolute bottom of the market, consider dollar cost averaging. Dollar cost averaging is a strategy where you buy the same dollar amount of shares on a regular schedule, like monthly or quarterly. You may buy shares when they are more or less expensive,, but on average your cost will be lower than if you try to time the market and fail. This can lead to bigger potential gains when the market does eventually turn around. This strategy can be incorporated into your normal portfolio rebalancing efforts.
Add bonds
Adding bonds during a stock market downturn can help cushion the decreasing value of the stocks in your portfolio. Ultra safe bonds like Treasurys carry no risk and can help investors sleep well at night while mitigating the impact of a stock market crash. Laddering bonds can offer cash to reinvest at various times, cash that you may feel comfortable putting back into stocks at various intervals.
Tax-loss harvesting
This may be a time to harvest tax losses on stocks or stock funds that have declined in value. This money can be reinvested elsewhere at lower prices and the tax losses can be used to offset gains realized in taxable accounts this year or in the future. Be careful not to reinvest the money back into the same stocks or funds sold, or into investments that are substantially similar. This is called a wash sale, and violating the wash sale rule can negate your ability to use these losses to offset gains elsewhere when filing your taxes.
Keep your long-term focus
It’s easy to get lost in the moment during a stock market crash. Bear markets, as well as more severe market crashes, happen. Don’t get caught up in this short-term noise. Focus on your long-term investing and financial plan. Make adjustments as appropriate, not based on panic. Invariably, investors who focus on short-term events end up regretting it.
Historical look at stock market crashes
Here is a look at several past stock market crashes.
The crash of 1929
The Dow Jones average dropped by about 13% on Black Monday, October 28, 1929 in the wake of what turned out to be the Great Depression. The market hit its low point in the summer of 1932 at 89% below its pre-crash highs. The markets did not recover to surpass their pre-crash highs until 1954.
Stock market crash of 1987
The Black Monday crash of 1987 occurred on October 19, 1987 and saw the Dow Jones average drop by 22.6%. This remains as the largest one-day market drop in history. This followed large runups in the market during the year up to that point. The crash was triggered by a series of negative news reports including a large trade deficit and a decline in the value of the dollar.
The markets recovered and surpassed their previous highs within two years. This crash led to the implementation of a number of safeguards and triggers including trading curbs to help mitigate this type of activity.
The crash of 2000
The late 1990s saw tremendous growth in technology and telecommunications stocks which ultimately led to a 50% drop in the S&P 500 and a 76% decline in the NASDAQ index. It took about seven years for the S&P 500 to reach its pre-crash highs, just in time for the crash of 2008.
The crash of 2008
The crash of 2008 occurred in the midst of the Great Recession of 2007-09. This came at the end of a multi-year housing boom in 2007 that led to a major recession that impacted financial institutions, the markets and the housing market. This period saw financial services giant Lehman Brothers file for bankruptcy. It also saw a meltdown in the housing market including many foreclosures in part fueled by the subprime mortgage boom during this time frame.
The S&P 500 lost nearly half of its value during this time and took about two years to recover. The stock market decline bottomed out in March of 2009.
The crash of 2020
This crash was fueled by the onset of the COVID-19 crisis. The Dow Jones average lost about 37% of its value between February 12 and March 23 of 2020. Within six months the major averages had regained the value lost and ended the up from the end of 2019 levels.
Frequently asked questions (FAQs)
What goes up if the stock market crashes?
There is nothing that will definitely go up if the stock market crashes. Interest bearing investments such as money market funds will continue to earn interest. Bonds may hold their value or increase, and individual bonds including Treasury's will continue to earn interest.
Some alternative investments may increase in value. This could include gold and precious metals, real estate and others including fine art. There are no guarantees here either unfortunately.
At what age should I get out of the stock market?
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn’t necessarily mean they should be totally out of the stock market. Whether an investor is in the stock market, and to what extent, should depend on their unique financial situation not reaching any particular age.
Where is your money safe if the stock market crashes?
Money held in an interest bearing account like a money market account, a savings account or others is generally safe from losses stemming from a stock market decline. Bonds, including various Treasury securities can also be a safe haven.
That said, beyond cash-type accounts nothing is totally safe from losses. Depending upon the circ*mstances triggering the crash, non-federally guaranteed deposit accounts could be susceptible to losses as well if the bank goes out of business. You will need to look at each type of holding you own or are considering and assess the risk related to each account.
Do I lose all my money if the stock market crashes?
While your stock holdings will likely take a hit in value during a stock market crash, most stocks generally retain a portion of their value. Each crash is a bit different, and the impact on various stocks and market sectors can vary widely.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.
