6 Things To Know About Crashes

6 Things To Know About Crashes

The first half of 2022 has seen a decline of about 20% and there are 6 lessons to be learned from this most recent downturn, according to an article in Morningstar:

  1. Stock markets are cyclical; it’s in their nature to go through long stretches of decline.
  2. It’s very difficult to determine precisely how long it will take for the market to rebound after a decline.
  3. To those investors who weather the storm and stick it out through a long period of decline, the stock market has delivered rich rewards.
  4. Resist the urge to panic sell when the market goes through a steep, fast drop.
  5. Don’t rely on the standard bell curve as a model of market returns as it doesn’t display the great risks that the equity market carries.
  6. From time to time, the market and the economy move in opposition to each other.

The article examined every bear market going all the way back to 1886, and in each instance the market eventually rebounded and climbed to record highs. That was certainly the case with the most recent crash at the start of pandemic in 2020; after only 4 months, the U.S. equity market was pushing higher than its pre-pandemic levels. The investors that held strong through each of those past downturns were handsomely rewarded, even those who have been sticking it out since January 2020; including the most recent drop last month, the market was still up 14% since January 2020.

And not all stock market crashes and recoveries look the same. The largest decline in history was the famous crash of 1929 when the market plummeted 79%. The next largest was in the early 2000s when cumulative value fell 57.6%. This most recent decline is currently at 17.5%—far down on the list of real downturns through history. Though it’s impossible to say how long this downturn will last or how long the recovery will take, using history as a guide would suggest that investors who can hold up under the pressure should keep calm and stay the course.

All of this goes to show just how unpredictable market crashes and downturns can be, and because it’s impossible to predict how long a downturn will last, it’s easy to see why some investors panic and get rid of their stocks. The best way to prepare for any crash is to have a well-diversified portfolio that suits one’s tolerance for risk as well as their financial goals, the article maintains.