I hope this isn't news to you: Another stock market crash is on its way. That's the bad news. The good news is that it isn't necessarily right around the corner. While many financial prognosticators on TV will offer opinions on when the next big crash is due, I don't feel like I'm shortchanging you with my own opinion: I don't know when it will happen. This is the best answer anyone can offer, in fact, since the stock market's short-term movements are extremely unpredictable. (Long term, the arrow has usually pointed up.)
Still, there are some things we can learn by looking at past crashes. At about.com, I recently ran across Dustin Woodard's review of our 10 worst stock market crashes. Here they are:
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%) |
What to learn from this
How can this information help you? Well, consider these thoughts:
- Regrettably, some of the crashes followed one another quite closely. For example, while the Dow sat near 400 in 1929, it remained below 100 by 1942. One could argue that this period suffered one long crash, instead of several small ones.
- A big question the table raises is: What caused this carnage? The answer, unfortunately, is that the reasons have varied over time. The Depression years saw several crashes, and there was one during and one soon after World War I, as well. Other factors that have been tied to crashes include inflation, speculative trading, insufficient regulation of the market (which has been strengthened over time), automated trading, and trade and budget deficits. Sometimes crashes occur without clear-cut reasons. The 1987 crash (featuring a one-day 23% drop), for example, has many alleged causes, but no one definitive cause that I could find.
- A last thing to notice is that there have always been recoveries, and the market trends upward in the long run. You sometimes have to wait a long time for a full recovery, though. This is especially true for those who invested in market darlings that soared, often unreasonably, prior to crashes. The Nasdaq 100 index, for example, made up of 100 of the biggest technology companies listed on the Nasdaq (and tracked by the PowerShares QQQ
(NASDAQ:QQQQ) exchange-traded fund), more than doubled between 1999 and 2000, and remains below 1999 levels today.
What to do about it
So what should you do with this information? Let it shape your investing. Let it be a reminder that anything can happen in the coming five or even 10 years, so you should only have your long-term money in stocks. You don't want to lose that sum you've socked away for a down payment on a house or for college tuition. Here are a few takeaways.
If you're frightened of any kind of significant drop, you might want to place stop-loss orders for your holdings with your broker. (Learn more about brokerages in our Broker Center.) You can, for example, specify that if Stock ABC falls 10%, you want it sold ASAP. This can protect you, but it can also evict you from some great performers that temporarily slump. (Read Jim Mueller on the dangers of stop-loss orders.)
Look for opportunity in crashes. If you have some cash on the side, or can generate some, you might be able to take advantage of some first-rate bargains (though, again, it might be a few years until you're rewarded). For example, on Black Monday in 1987, Home Depot
Consider investing mainly in certain kinds of companies -- stable growers that pay significant dividends, which you'll receive no matter what the market is doing. Look at this chart of Procter & Gamble
If you're interested in adding some (or many!) significant dividend payers to your portfolio, I invite you to test drive, for free, our Motley Fool Income Investor newsletter. Its recommendations have been beating the S&P 500 by nearly 10 percentage points on average. A free trial (no obligation to subscribe) will give you full access to every past issue.
Here's to doing well through the coming crash!
This article was originally published on March 21, 2007. It has been updated.
Selena Maranjian owns shares of Home Depot. Home Depot is an Inside Value recommendation. Bank of America and UPS are Income Investor picks. The Motley Fool is Fools writing for Fools.