A Market Crash Is Coming

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:

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. Cisco Systems (NASDAQ:CSCO), for example, remains a strong and promising company, but most of those who invested in 2000 are still in the red. 

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, General Electric (NYSE:GE) stock fell from a high of $50 to $38.75 before closing at $41.88 (which in today's split-adjusted terms would be $2.13). It recovered quickly, surpassing $3 by July 1989 and $4 in July 1990. Recently, it was trading above $37 per share. Another example: Look at this chart of Lowe's (NYSE:LOW), and you'll see that investors who bought during 2001's opportunity have done rather well.
• 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 Johnson & Johnson (NYSE:JNJ), for example, and see how steady it was from the 2000 to 2002 during the market crash. Altria's chart is more jagged, but it still shows the value of hanging on to steady growers. Over the past decade, through market ups and downs, J&J's dividend has grown by a compound average rate of 14%, and Altria's has grown by 6.5%. (Some other dividend-paying companies worth a closer look are JPMorgan Chase (NYSE:JPM) and Coca-Cola (NYSE:KO), recently yielding 3.4% and 2.2%, 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 March 21, 2007. It has been updated.

Longtime contributor Selena Maranjian owns shares of General Electric, Johnson & Johnson, and Coca-Cola. For more about Selena, view her bio and her profile. Coca-Cola is a Motley Fool Inside Value recommendation, while Johnson & Johnson and JPMorgan Chase are Motley Fool Income Investor recommendations. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.