I hope this doesn't surprise you: Another stock market crash is on its way. That's the bad news.

The good news is that it probably isn't right around the corner. Many financial prognosticators on TV will offer opinions on when the next big crash is due, but I don't feel I'm shortchanging you with my opinion:

I don't know when it will happen.

This is the best, most honest answer anyone can offer, because the stock market's short-term movements are extremely unpredictable. (In the long term, the arrow usually points up.)

There are many things we can learn by looking at past crashes. At about.com, I found Dustin Woodard's assessment of the United States' 10 worst stock market crashes:



DJIA Fell ...




57 to 31




75 to 39




110 to 66




120 to 64




381 to 199




294 to 41




194 to 99




156 to 93




1,052 to 578




11,793 to 7,286


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 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 data raises is this: What caused the carnage? 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 (an idea that has been strengthened over time), automated trading, and trade and budget deficits.

    Sometimes crashes occur without clear reasons. The 1987 crash, which featured a one-day 23% drop, for example, has many alleged causes, but no single, definitive trigger I could find.

  • A last thing to notice is that there have always been recoveries, and the market trends upward in the long run. Sometimes we have to wait a long time for a full recovery. This is especially true for those who invested in market darlings that soared, often unreasonably, prior to crashes. Sun Microsystems, for example, soared from roughly a split-adjusted $24 to more than $200 between 1998 and 2000, and remains well below 1998 levels today. Texas Instruments (NYSE: TXN) charged above $80 in early 2000, but was recently still trading for considerably less than half of that. Corning (NYSE: GLW) shares are only at about a quarter of their pre-crash peak.

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 slump temporarily. (Read Jim Mueller on the dangers of stop-loss orders.)

  • Look for opportunities 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 -- although, again, it might be a few years until you're rewarded.

    For example, on Black Monday in 1987, Wal-Mart stock fell 24% before the opening bell, from about $29 to $22 (which in today's split-adjusted terms would be a drop from $3.63 to $2.75). It gained back that ground within a few months, and it had more than doubled within three years. Recently it was trading around $57 per share, representing more than a 15-bagger for 1988 investors. Look at Yahoo!'s chart, and you'll see that investors who bought after the recent Internet bubble burst have done rather well. Of course, some stocks, such as 3M (NYSE: MMM), kept rising throughout the bubble period, seemingly oblivious to it.

  • Consider investing 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 Colgate-Palmolive, for example, and see how little it was rocked by the 2000 to 2002 market crash. Over the past decade, through market ups and downs, Colgate-Palmolive's dividend per share has grown by a compound average annual rate of roughly 10% over the past decade. Some big companies recently offering hefty dividend yields include Merck (NYSE: MRK), DuPont (NYSE: DD), and General Motors (NYSE: GM), yielding 3.8%, 3.3%, and 4.8%, respectively. You may want to look into some of them more closely.

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 seven 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 Wal-Mart and 3M. Wal-Mart, 3M, and Colgate-Palmolive are Motley Fool Inside Value recommendations. The Motley Fool is Fools writing for Fools.