The five biggest stock market crashes in US history – and how to prepare for the next one

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The US stock market got off to its worst start since 1939 this year – and some experts fear this is just the beginning. With rumors of an impending recession, inflation at its highest level in over 40 years, and volatile trading days, many investors fear that we will see another crash in the weeks or days ahead.

What would a stock market crash look like and how long would it take to recover from it? The stock market has had five major crashes in its history, and each time it has rebounded. The biggest variable is how long it took to recover.

“You never know what the next big crash will be, whether it’s COVID-19, or the Great Recession, or what we’re going through today,” says Melissa Bouchillon, CFP and managing partner at Sound View Wealth Advisors in Savannah. , Georgia . “You should always have a component of your portfolio prepared for when things go wrong.”

So what can investors do to prepare? We’ll take a look back at five of the biggest stock market crashes in US history and how to get in financial shape in case one is on the way.

What is a stock market crash?

A stock market crash is a sudden, sharp drop in stock prices that can be caused by a variety of factors. There is no established benchmark for what constitutes a crash.

The Five Biggest Stock Market Crashes in US History

2020: The crash of COVID-19

  • Market loss: 34%
  • Recovery time: 33 days

The latest crash still on the minds of many investors is the one caused by the COVID-19 pandemic. Because of the virus, world governments have shut down entire economies to slow the spread, causing an economic shock that has rattled investors.

Unlike the other accidents on this list, this one struck surprisingly quickly and recovered just as quickly. The stock market fell 34% but regained its peak in just 33 days, a historically quick reversal. With previous crashes, the journey down – and subsequent recovery – was slower.

The US government responded in part by injecting trillions dollars in the US economy. Between money printing and stimulus payments, it was the most cash added to circulation since 1945.

Despite the terrible human costs of the pandemic and the financial pain felt by millions, what followed was an incredible market rally. Companies posted record profits, valuations soared and, for a time, the market reacted as if the crash had never happened.

2008: The subprime crisis

  • S&P 500 loss: 57%
  • Recovery time: 17 months

The cause of this crash was the banks’ lax mortgage lending practices (particularly sub-prime mortgages), which had a ripple effect throughout the economy, resulting in the worst crash since the Great Depression. “It was a very specific trigger. There were some really terrible loans in the housing market,” says Linda García, founder of In Luz We Trust, a financial coaching firm.

As residential home foreclosures increased, so did the national unemployment rate. The S&P 500 has fallen nearly 57% from its peak and dragged global markets down with it. « Ratings [of homes] were actually not good and prices were skyrocketing,” adds Kimberly R. Nelson, Advisor at Coastal Bridge Advisors.

The recovery came from government bailouts, further injections of liquidity into the economy and interest rates reduced to historic lows.

It took about 17 months for the market to recover. When it did, one of the longest and most profitable bull runs in history started in 2009 and lasted until 2020 – the start of the COVID-19 pandemic. During bull markets, market confidence is high and investors are eager to buy stocks. The reverse is true in bear markets.

2000: The Internet bubble

  • Loss on Nasdaq: 77%
  • Payback time: 15 years

At the start of the 21st century, the stock market was reeling from the aftermath of the “dotcom bubble,” caused by the major overvaluation of technology companies in the late 1990s. A bubble is caused by valuations that do not match the financial stability of a business and is often boosted by eager investors trying to chase the next big thing, even if a business has no revenue. This was the case for many of these technology companies.

It was the first big crash for the tech stocks that make up the Nasdaq Composite Index. Between 1995 and 2000, the Nasdaq rose more than 500%. In 2002, the index fell nearly 77% and will not reach its former peak for nearly 15 years.

1973: The oil crisis and the economic recession

  • Market loss: 48%
  • Recovery time: 21 months

At the time, this crash was the worst since the Great Depression. There was not one event that caused the accident, but a series of events.

First, there were several financial reforms, including the removal or decoupling of the dollar from gold, which undermined the stability of the dollar and contributed to runaway inflation. In parallel, there was an economic recession, then the oil crisis of 1973, during which the price of oil almost quadrupled and accelerated inflation much faster.

All combined, these events created a crash that saw the market fall 48% – taking around 21 months to recover.

1929: The worst accident in history

  • Dow loss: 89%
  • Payback time: 25 years

The stock market crash of 1929 ended the Roaring Twenties and sparked the Great Depression. The stock market contracted so much that it took until 1954 to fully recover its pre-crash value.

The shares began to fall in September of that year, but two consecutive days at the end of October – the 28th and 29th – saw a drop of almost 13% and another drop of almost 12%, respectively. Those days are now known as Black Monday and Black Tuesday, still the biggest two-day loss in history. This was enough to induce investors to panic sell.

A few weeks later, the Dow lost half its value (the S&P 500 and Nasdaq weren’t used as markers at the time) and entered a long bear market. In 1932, the market bottomed out at a staggering 89% below the peak.

This period of history was tumultuous, with the Great Depression, Dust Bowl, World War II and other distressing international events. Hundreds of companies have filed for bankruptcy.

Pro tip

Dips and crashes are a natural and expected part of investing. With a long investment schedule, the best thing to do is to stick to your plan.

What investors can do to prepare

Crashes and downturns are part of investing and the only way to lose money during a market downturn is to sell your investments. If history is any indication, your investments will make up for their losses over time.

Yet, in times of volatility and uncertainty, there are things you can do to shore up your finances.

Pay off high interest debt

Any debt above 8% is called toxic debt. This is because the stock market traditionally returns an annual rate of 8-10%, so any debt above that is debt that is causing you to lose money. Credit cards and high interest personal loans often fall into this category. To manage toxic debt, make a budget and a repayment plan. This will help you take control of your money and build your credit. It will also put you in a good position to start an emergency fund, if you haven’t already.

Have a fully funded emergency fund

Experts agree that everyone should have an emergency fund, or cash safety net, in case something happens, like job loss or some other financial burden. Usually 3-6 months of spending is best, although some experts say more than 9 months to a year of spending is best. The best place to keep an emergency fund is in a high-yield savings account.

Don’t spend excessive amounts

Times of economic uncertainty may not be the time to buy that new TV or that new car. In a recession, it’s best to keep your money where you can see it: in a fully funded emergency fund and, if you can, invested.

Make sure your investments are diversified

Once you’ve made sure your ducks are lined up—that is, your high-interest debt is paid off and your emergency fund is fully funded—investing is a great next step. Many investors find opportunities like this to invest in because stocks are “on sale.”

Investing is for everyone, regardless of age. And the sooner you start investing, the better.

Diversifying your investments and spreading your money among hundreds or thousands of different companies is what experts agree you should do to build a strong investment portfolio. Once you’ve chosen a brokerage you like, like Fidelity or Charles Schwab, find a target date fund for your investments. Target date funds eliminate investment assumptions and adjust your risk tolerance based on your age. Index funds are also great options. These funds follow the whole market or a particular type of stock. Keep the cost average or put the same amount of money into your accounts each month, to maintain a constant flow of money to your investment accounts.

“For people who have a long-term horizon and invest monthly in their retirement plan using the dollar-cost averaging method, it’s actually good to buy now,” says Bouchillon.

The best way to cope when the market starts to fall is to stick to your plan, remember why you’re investing, and stick to your regular investment schedule.

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