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What should I do when the stock market crashes?

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As they watch their hard-earned savings sink and fret about average stock market recovery times, the instinct can be to get out before it gets worse. However, not selling out during a stock market crash is sound advice, and we’ll tell you why…

 

Stock market crash vs stock market correction

An occasional crash is the price investors pay for the higher returns available from stock markets. Otherwise, investing would be easy. The trouble is, people tend to over-react to stock market volatility, often selling out just as markets are about to recover. In fact, sometimes what seems like a stock market crash is actually just a stock market correction (technically the definition of a stock market correction is a fall of around 10% versus a fall of more than 20%, which then becomes a ‘crash’). These corrections are a natural part of the cycle and actually happen pretty frequently (about once a year, according to Deutsche Bank). And investors should remember: the strongest gains often come after the biggest falls.

 

So should I sell during a stock market crash?

US research group Dalbar runs a study on investor behaviour each year. It has found investors have lost an average of 8% per year over the last 30 years, as a result of buying at the wrong time and selling at the wrong time. As such, it’s really important to stay invested, no matter how uncomfortable it feels.

With that in mind, we list below the trajectory of previous stock market crashes and recovery times. Hopefully they’ll provide a little context and show that, in most cases, it pays to keep calm and carry on.

 

19th October, 1987: Black Monday
When markets crashed in Hong Kong, a global domino effect spread to Europe and then the US. It resulted in a 22.6% drop in value of the Dow Jones Industrial Average in one day – the largest fall in 30 years. Many investors panicked and sold out. But not the patient ones. A £10,000 investment dropped to £6,610 in a matter of weeks – but its value had risen to a whopping £32,690 by 1997, showing patience often pays.

10th March, 2000: Nasdaq’s descent
Things looked bleak for the Nasdaq following the turn of the century. Peaking at 5,133, the technology-heavy index then fell by 78% in just 30 months. The dot-com bubble had burst. But did it spell the end for companies such as Amazon and eBay? Clearly not. They’ve gone on to make investors a pretty penny, with the Nasdaq today sitting at 7,336.

15th September, 2008: When the banks went bankrupt
Still fresh in the mind of many investors is Lehman Brothers filing for Chapter 11 bankruptcy protection. Triggering a financial crisis that almost toppled the entire banking system, and causing the FTSE 100 to sink by 47%, this severe crash led to frantic selling and phenomenal losses. Those who bought at the peak had a five-year wait for the stock market to recover. But it’s not all bad news: many investors will have kept receiving their dividends and, by now, will have seen a return to their gains. Again, patience is key.

February to October 2018: FTSE falls again
OK, markets haven’t come back yet, but let’s put the recent volatility in context. The FTSE 100 currently sits at 6,939. That’s roughly the level it was 18 months ago. Certainly, it has been as high as 7,730 since, but you’d have had to be super-unlucky to buy right at the peak. And remember, you could have had dividends in the meantime.


Selling during a stock market crash: An exception to the rule
As ever, there is one awkward exception to the “it will come back in the end” rule… Japan.

On 29th December, 1989, Japan’s Nikkei Stock Average finished the year at an all-time high of 38,916. Not bad, until reality set in. For years, a so-called asset bubble had sent property prices rocketing into the stratosphere… and what goes up must come down. This time in the form of a deflationary recession. Today, after almost 30 years, the Nikkei Stock Average still only sits at 21,269. So although patience often pays, the lesson here is this: don’t put all your eggs in one basket.

 
Markets bounce around. Shutting your eyes and hoping for the best isn’t often a sensible strategy, but with investing, it’s generally the best way.

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