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Understanding 100 Years Of Stock Market Crashes And Recoveries

Overall, the stock market has been on a strong positive upwards trajectory for the past couple of years and this has got many people to think about whether or not a possible stock market crash could be right around the corner.

Stock market crashes can be intimidating, but history offers valuable lessons on how these downturns often lead to recovery.

By looking back at major crashes over the last century, we gain insights into how markets behave during crises and what strategies can help investors come out ahead.

Let’s dive into these lessons, explore how past recoveries unfolded, and discuss practical steps you could consider taking now to help secure your financial future.

1. Lessons From 100 Years Of Stock Market Crashes

The stock market has seen significant crashes, with one of the most notable starting in 1929. Leading up to this crash, stocks surged to unprecedented highs, only to drop sharply, resulting in a loss that set back the market for years.

Though the Great Depression was devastating, those who held their investments over the long term eventually saw returns.

In the 1980s, we saw another major market downturn known as Black Monday in 1987. Once again, this crash sparked panic, but it recovered more quickly than the one in 1929.

The dot-com bubble in 2000 and the housing crisis in 2008 are more recent examples where the market eventually bounced back after significant drops. These historical trends show that while crashes can be severe, they don’t last forever.

2. Why Stock Market Crashes Happen

Each market crash is triggered by unique circumstances. In the Great Depression, it was largely unchecked speculation. Black Monday involved rapid computerised trading.

The dot-com bubble was fuelled by overly optimistic investments in internet companies, and the 2008 crisis stemmed from risky mortgage lending and a housing bubble. In 2020, the COVID-19 pandemic led to a sudden market downturn as people around the world went into lockdown.

Despite different triggers, each crash had a similar result: panic selling, followed by a period of recovery as the economy adjusted.

Today, more people than ever have access to stock markets, which changes how markets respond. Apps like Robinhood make investing accessible, but they also introduce more volatility as more people, some with less experience, buy and sell stocks.

3. How You Can Prepare For Market Crashes

If history teaches us anything, it’s that downturns are a normal part of the stock market’s cycle. Here are practical ways to manage your investments during turbulent times:

• Build an Emergency Fund: I like to call this a peace of mind pot. Having funds set aside for emergencies can prevent you from selling investments at a loss if you need cash.
• Invest Gradually: By investing regularly, you can take advantage of lower prices during downturns. This strategy, known as dollar-cost averaging, can help you build wealth over time without needing to predict market bottoms.
• Diversify Your Income: Many jobs can be done online, such as virtual assistance, marketing, or content creation. Having multiple income sources can reduce the pressure to sell investments during economic hardships.

4. Recoveries Can Be Faster Than Expected

Each crash eventually leads to a recovery, often faster than anticipated. Although the 2008 crisis took about four years for the market to return to pre-crash levels, recent market recoveries, such as during COVID-19, were more rapid.

With information and technology advancing quickly, markets have become more responsive to economic shifts, making recovery times shorter in some cases.

5. Take Advantage Of Down Markets

When the stock market is down, stocks essentially go on “sale.” Instead of panicking, you could consider downturns as opportunities to buy your favourite stocks at lower prices.

This approach can help set you up for long-term success, especially if you follow the steps above to build an emergency fund and diversify income streams.

Starting small and gradually building your investment portfolio in line with your unique risk tolerance and financial goals can make a big difference over time.

Conclusion: Learn From History, Plan For The Future

Market crashes are part of a repeating cycle. While it’s natural to feel uneasy, historical patterns show that every downturn eventually turns upward.

By preparing in advance, diversifying income, and approaching investments with a long-term perspective, you can confidently navigate market downturns and position yourself for future growth.

The stock market tends to reward patience and strategic planning. Financial literacy is crucially important as you might have already seen in a recent blog post, so your best protection is to significantly enhance your own financial education, stay informed, stay safe, and make your financial future a priority.

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