The Psychology That Kills Returns
What to Do When the Market Crashes
What to Do When the Market Crashes
The market will crash. This is not a prediction -- it is a guarantee. Since 1950, the S&P 500 has experienced:
- A 10%+ decline roughly once per year
- A 20%+ decline (bear market) roughly once every 3-4 years
- A 30%+ decline roughly once per decade
- A 50%+ decline twice (2000-2002, 2008-2009)
You will experience multiple serious crashes during your investing lifetime. Your response to them will determine most of your long-term outcome.
What a Market Crash Actually Is
A crash is a period during which the market offers you the same ownership stakes in the same companies at a significant discount.
If you thought VTI was worth buying at $220, it is even more worth buying at $155. The underlying companies did not change that much. The market's temporary opinion of them did.
When you sell during a crash, you are selling ownership in real companies because their temporary price tag dropped. You are also locking in a loss that would have been temporary, and missing the recovery.
The Recovery Record
Every single major US market crash has been followed by full recovery and new highs:
| Crash | Peak Decline | Years to Recover |
|---|---|---|
| Great Depression | -89% | 25 years (extreme outlier) |
| 1973-74 Oil Crisis | -48% | 7 years |
| Black Monday 1987 | -34% | 2 years |
| Dot-com 2000-02 | -49% | 7 years |
| Financial Crisis 2008-09 | -57% | 4 years |
| COVID 2020 | -34% | 5 months |
Note that recovery time assumes you held through the entire decline. If you sold at the bottom and rebought after recovery was confirmed, you locked in the loss and missed the rebound.
The Pre-Crash Decision
You cannot make good decisions during a crash. Fear is too loud. Make the decision now, before it happens:
Decide in advance: I will not sell my index funds when the market drops 40%. Write it down. Tell your partner. Make it a rule, not a real-time decision.
The investors who came through 2008 best were not the ones who made clever timing calls. They were the ones who had pre-committed to staying invested and had the automation in place to keep contributing automatically.
During the COVID crash of March 2020, the S&P 500 fell 34% in 33 days -- the fastest crash in history. It fully recovered within 5 months. Investors who sold in March locked in a 34% loss. Investors who held recovered fully by August. Investors who bought more in March made extraordinary returns.