Since I write about the stock market, people often ask me when I think the market will crash next -- because there's always a next time, right? And though many financial prognosticators on TV seem to love predicting when the next big one will happen, my answer has always been the same, even when the market was doing well: "I don't know."
Let's face it: No one ever knows. There are too many influences, too many factors. The most anyone can do is guess. Of course, no one's asking me that these days, because it's still happening.
But although I never know when the next market crash will happen, I know a little something about what happens after the market goes down.
It's happened before, after all
It's helpful, at times like these, to cast an eye backward and see what we can learn from previous crashes. Here's one assessment of the U.S.'s 10 worst stock market crashes -- and remember that this doesn't include the drops of 2008:
Began |
Ended |
DJIA Fell ... |
Change |
---|---|---|---|
6/17/1901 |
11/9/1903 |
57 to 31 |
(46%) |
1/19/1906 |
11/15/1907 |
75 to 39 |
(49%) |
11/21/1916 |
12/19/1917 |
110 to 66 |
(40%) |
11/3/1919 |
8/24/1921 |
120 to 64 |
(47%) |
9/3/1929 |
11/13/1929 |
381 to 199 |
(48%) |
4/17/1930 |
7/8/1932 |
294 to 41 |
(86%) |
3/10/1937 |
3/31/1938 |
194 to 99 |
(49%) |
9/12/1939 |
4/28/1942 |
156 to 93 |
(40%) |
1/11/1973 |
12/6/1974 |
1,052 to 578 |
(45%) |
1/15/2000 |
10/9/2002 |
11,793 to 7,286 |
(38%) |
So let's compare that with what we've been experiencing:
- On Monday, Sept. 29, the Dow dropped 778 points, the biggest single-day drop recorded at the time. It was also a biggie percentage-wise at around 7%, but that's nothing next to 1987's drop of roughly 23% in a single day.
- On Oct. 13, the Dow experiences its largest one-day point gain, rising 976 points or a whopping 11.1%.
- Since the all-time high on Oct. 9, 2007, the Dow Jones Industrial Average has fallen nearly 40%.
Holy volatility, Batman!
Where am I going with this?
Here are three key lessons we can learn from all those ugly numbers.
- We can only know some things in hindsight. For example, people focus on the crash of 1929, but although the Dow sat near 400 in 1929, it remained below 100 in 1942 -- and one could argue that this was all one long crash instead of several small ones. We won't be able to see the beginning or the end of a crash until it's long over.
- There aren't always clear causes. The 1987 crash, which featured a one-day drop of 23%, for example, has many alleged causes, but no single, definitive, agreed-upon trigger. Irresponsible lending was a major precipitator of the crash we're in, but it wasn't the only one. Trying too hard to find the cause may blind us to an important truth: There will always be crashes.
- The market has always recovered. Although there were many significant crashes in the 20th century, the market trended up 10% a year, on average. So, although we may have to wait a while for a full market recovery, there's no reason to think it won't recover this time.
What should you do now?
Here are a few good rules of thumb for making it through a market crash.
- Don't panic. Know that the market will always go up and down, sometimes sharply. Expect this to happen, and keep your cool when it does.
- Don't invest any money in the stock market that you'll need within five years. As we've seen, the market can do anything in the short term. Having your son's college money in the market when he's a senior in high school, for example, could mean that his choices are much more limited if the market takes a steep decline.
- If significant drops make your palms sweat, you can place stop-loss orders for your holdings with your broker. This can protect you, but it can also evict you from some great performers that slump temporarily.
But most of all, look for opportunities in crashes. According to many of our greatest investors, this is the time to buy stocks. As Shelby Davis once said, "You make most of your money in a bear market. You just don't know it at the time."
For example, on "Black Monday" in 1987, J.C. Penney
So what might those opportunities look like? I suggest strong dividend payers -- stable growers that pay significant dividends no matter what the market is doing.
Colgate-Palmolive
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Longtime contributor Selena Maranjian owns shares of no company mentioned in this article. United Parcel Service is an Income Investor recommendation. The Motley Fool is Fools writing for Fools.