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? Here are a few key lessons:

  • 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 in this period there was one long crash instead of several small ones.
  • A big question the table raises is this: What caused the carnage? Unfortunately, the reasons have varied over time. The Depression years included several crashes, and there was one during and one soon after World War I as well. Other factors 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 trigger 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. Motorola (NYSE:MOT), for example, leapt from roughly the split-adjusted teens to the high $40s between 1998 and 2000, but was recently trading below 1999 levels. Intel (NASDAQ:INTC) charged above $60 in early 2000, but was recently still trading for less than half of that. Amazon.com (NASDAQ:AMZN) shares have only recently approached 1999 levels.

What to do about it
Let this information shape your investing, reminding you that anything can happen in the coming five or even 10 years. 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, Target stock fell a whopping 33%, from about $45 to $30 (which in today's split-adjusted terms would be a drop from $2.79 to $1.79). It gained back that ground within a year, and it had more than doubled within two years. Recently it was trading around $64 per share, representing a 35-bagger for 1987 investors. Look at Yahoo!'s chart, and you'll see that investors who bought after the Internet bubble burst have done rather well. Of course, some stocks, such as 3M, kept rising throughout the bubble period, seemingly oblivious to it.
  • 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. Citigroup's chart shows the value of hanging onto steady growers. Over the past decade, through market ups and downs, Citigroup's dividend per share has grown by a compound average annual rate of 27% over the past decade. (Some other dividend-paying companies worth a closer look are Pfizer (NYSE:PFE), Heinz (NYSE:HNZ), and Mattel (NYSE:MAT), recently yielding 4.7%, 3.4%, and 3.0%, respectively.)
  • 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 some six percentage points on average. A free trial (with 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 Mar. 21, 2007. It has been updated.

Longtime contributor Selena Maranjian owns shares of 3M. 3M, Intel, and Pfizer are Motley Fool Inside Value recommendations. Yahoo! and Amazon.com are Motley Fool Stock Advisor recommendations. Heinz is a Motley Fool Income Investor recommendation. The Motley Fool is Fools writing for Fools.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.