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What You Need To Know About Stock Market Crashes

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Putting stock market crashes into perspective and how to navigate the storm

The sky is falling an d it’s the end of the world because the market is down 14% in the last week!  This is how the media portrays what has been going on in the stock markets.  However, it is most certainly not the end of the world. The S&P 500 has declined by more than 3% in one day 100 times since the 1950s.  These declines are usually followed by a rebound as well.  The stock market is a volatile place and while we have enjoyed a six year bull market sometimes the market needs to correct.  Especially when Facebook is valued the same as Pepsi and Coke combined.

Learn why you should not worry about a stock market crash.

When you look back through history, stock market crashes of 33% or more, peak-to-trough, aren’t terribly unique.  When the Dow Jones Industrial Average hit a high of 18,351.40, you should have mentally thought, “Alright, anything between here and a drop down to 12,111.92 is business as usual; nothing special and, in fact, might statistically happen”.  If you had $500,000 in your combined retirement accounts, that would mean a paper loss in quoted value of $170,000, bringing you down to $330,000.  Given your asset allocation is right and you aren’t speculating heavily in individual securities, this shouldn’t elicit more than a rough grunt of acknowledgement.  It’s simply not worth noting once you’ve been around the block any more than a rational person freaks out when a thunderstorm showers the Earth with water or an eclipse covers the sun.  That’s life.

The tips for preserving your wealth during a crash are having a balanced portfolio of cash and bonds vs equities and reinvesting your dividends.  If you invest $100 per month in a basket of equities sometimes you will buy them for a high price and sometimes you get them for a low price.  Overall though your cost basis should be lower than the current market value of your stock using this method. $100 when a stock is $50 per share will get you two shares then say it’s a year later and the value is $25 per share now you pick up 4 shares.  At the end of the day on average the S&P 500 earns 8% per year. Just because the market is going down does not mean it is the end of the world.

See the tips to navigate a falling stock market and why you shouldn’t worry.

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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.


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