What the last big crashes tell us
These are the approximate falls of the S&P 500 (the 500 largest US companies), without dividends, and how long it took to get back to its previous high:
Dot-com bubble (2000–2002): fell about 49% and took around seven years to regain its high. Financial crisis (2007–2009): fell about 57% and took around five and a half years. COVID (2020): fell 34% in barely a month and recovered in about six months. Inflation and rate hikes (2022): fell about 25% and took around two years.
With dividends reinvested, recoveries were somewhat faster.
People who kept investing came out better
If you invest every month, a crash does not only take money away: it also lets you buy cheaper. People who kept investing through 2008 and 2009 bought fund units at half price, and those units were the ones that rose the most afterwards. They often got their money back well before the index returned to its high.
What does the most damage is not the fall itself, but selling at the worst moment and not getting back in until prices have already risen.
Not every crash ends quickly
It would be dishonest to say markets always recover in a few years. Japan’s Nikkei index took about 34 years to get back to its 1989 high. And the tech-heavy Nasdaq fell about 78% in 2000–2002 and took around fifteen years to recover.
The lesson is diversification: a global fund with thousands of companies from many countries greatly reduces the chance of getting stuck in a single market or sector.
How to prepare before it comes
Keep an emergency fund in cash, so you do not have to sell investments if you lose income in the middle of a crash. Only invest money you will not need for several years. And write down what you will do if your portfolio falls 30%: following a plan is much easier than improvising in fear.
Frequently asked questions
Should I sell when it starts falling?
Nobody knows in advance when a fall will end. Historically, many of the market’s best days come right after its worst ones, and people who are out miss them.
How far can a global fund fall?
In 2008 global indexes fell more than 50%. It is reasonable to be ready to see your stock portfolio at half its value at some point in your investing life.
Do bonds help?
They usually fall less than stocks and soften the blow, although in 2022 they fell together with stocks because of rising interest rates.
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Educational content. Not financial advice: past returns do not guarantee future ones.