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What should you do when the stock market crashes?
Stock market crashes can be some of the hardest times to be an investor especially if you're
just starting out.
If you haven't been investing for very long it can be pretty scary seeing your Investments
go down by 20%, 30%, 40%, or even over 50% in the span of just a few short months.
Earlier on this channel, I did a video going over many of the major stock market crashes
of the past 50 or so years.
I went over how big of a hit the market actually took, as well as how long it took for the
market to recover its previous high.
I then extrapolated that information and discussed what would happen to someone's net worth if
they sold their investments when the market crashed compared to if they just stopped investing
during the fall and even if they kept investing the same amount or more during the crisis.
And in that video, we found out that most Market crashes don't last more than 2 or 3
years (obviously there were exceptions such as the dot-com bubble or the housing crisis
but most were not that long or that bad).
We also found out that continuing to invest as much as you were prior to the crash or
even more could have a pretty significant effect on your net worth as compared to stopping
investing during the fall or even worse selling your Investments.
However, one angle that I didn't really touch on that I kind of wish I did was how much
faster someone could recover their personal net worths during market crashes in comparison
to the stock market itself.
So I'm going to touch on that angle in this video.
Today we're going to see how long it takes an individual's net worth to recover from
various stock market crashes using the S&P 500 as an example.
I'm going to be looking at scenarios where the individual was investing one year prior
to the crash as well as 5 years 10 years and 20 years prior to the fall and show how even
though it might take the stock market say 7 or so years to recover from a crash like
the S&P 500 did during the dot-com bubble it doesn't actually take that long for the
individual to recover from that same crash assuming they keep investing.
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
Investing, debt, retirement, and many other general financial education videos because
the school's aren't going to do it for us.
So if any of those topics sound interesting to you or if you want to learn how to better
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this video with a friend, and leave a comment below letting me know what topics you'd
like me to cover in future videos.
So as you can tell this video is going to be of the longer variety and in the interest
of keeping this under 20 minutes, I'm only going to be looking at three major stock market
crashes.
The crashes I'm going to be looking at are the crash of the 1970's, the dot-com bubble,
and of course the housing crisis.
I chose these three crashes specifically because the max drop from the market's peak to its
low point during the crash was over 45% in all cases, so statistically, they are among
the worst in our stock markets history.
My hope is that by using specifically these three crashes as examples, in combination
with the knowledge that we gained from my previous stock market crash video, we will
be able to invest more confidently even during less-than-ideal times because we know that
we can recover from any crash.
So without further adieu, let's get started.
The crash of the 1970's began in December of 1972 when the S&P 500 reached a peak of
$118.05 before dropping to a low of $63.54 in September of 1974.
That was a total drop of about 46.2% and it would take the market nearly another 6 years
to fully recover and set a new record high of $121.67 in July of 1980.
In total, this Market cycle lasted for about 91 months, or 7 years and 7 months but how
much of a difference could an individual make if they continued investing during the crisis?
Let's take John, for example, he starts investing $500 a month and decide that he will continue
investing that $500 a month regardless of what the market does.
If he began investing in December of 1971 or one year before the start of the crash.
By the end of his first year of investing due to the market slowly creeping up, he has
a net worth of $6,461.87.
That's when the market begins to tank.
However, John doesn't really notice this, not because he's not paying any attention
to what the markets doing, because he is even though he's not letting it affect his investing,
but because his net worth is actually by and large still going up.
At the end of his second year of investing he has a net worth of $10,649.71.
This trend continues for another 7 months where John reaches what then was an all-time
high net worth of $12,803.65.
At that point, the markets drops finally catch up with him and his net worth over the next
3 months drops from over $12,800 to $10,800, or about 15%.
Now losing $2,000 off your net worth over the course of 3 months is not necessarily
an ideal situation but considering that the S&P 500 is itself down 46.2% since the start
of the crash and John's net worth has gone up since the start of the crash from almost
$6,500 to $10,800 he's not doing half bad.
As a matter of fact, he's up about 67% as an individual despite the crash.
He'd certainly be up even more if the market had continued to grow, but considering the
circumstances and the fact that it only took 4 months before John's net worth was once
again above $12,800, he's doing alright.
And of course as it always does, the market itself eventually recovers and John's net
worth continues growing, but now at an even faster pace.
By the time the market fully recovers in July of 1980, about 8.5 years after John began
investing he has a net worth of $64,825.
Which means that in the 8 years and 7 months that he's been investing, John's average
rate of return has been about 5.25% which doesn't sound that great, but keep in mind
that's his rate of return during a major market crash.
We haven't taken into account any bull market's that may have come afterward.
We just had him start investing a year before the crash (so he was buying at basically the
highest point of the market) and until the market got back to where it was before the
start of the crash.
That's it.
During that same span, the market gains very little, if anything, while John only sees
a temporary 15% drop in his investments which disappears completely in 4 months and he still
earns 5.25%.
Those are the things to keep in mind here.
But while it is nice to know that we're less likely to personally feel the brunt of a market
crash if we haven't been investing for very long obviously the numbers do change a bit
if we have been investing for a while.
Let's say John had been investing for five full years before the start of the crash.
What would the numbers have looked like then?
Well, we would see that John has a $37,300 net worth when the market hits its peak, which
actually ends up rising to about $39,200 due to the fact that the market didn't drop
like a rock right away in this particular crash.
However, when the bottom really did fall out of the market his investment's net worth
dropped from that $39,200 net worth down to just over $27,000 in 11 months.
It was a 31% drop and John wouldn't personally recover from it for another 7 months.
Meaning that the cycle starting from when the market reached its peak to when John himself
recovered took 18 months or about a year-and-a-half to complete.
When the market fully recovered in July of 1980 John's net worth was just over $96,000.
So, again during that time span, the market gains very little, if anything and John's
sees a temporary 31% drop in his investments, which is big don't get me wrong but not
nearly as big as the 46% drop the market experienced, and it disappears completely in 7 months and
he still earns 3.75% per year during one of the worst crashes in the stock market's
history.
And of course, that's not counting the bull market that followed this crash which saw
the S&P 500 reach a value of about $330 per share, which is over 2.5x the value of the
market in 1980, before the flash crash of 1987, which lasted less than 2 years.
Anyway, the percentages weren't as good as in the previous example where John only
started investing 1-year before the start of the crash but that makes sense, right?
If you had been investing $1,000 per year and buying 10 shares of stock worth $100 each
for 20 years... your 200 shares would be worth $20,000.
Then if the market crashes and your investments go down by 50% the next year you would still
invest your $1,000 but this time you would buy 20 shares of the stock since it is now
worth $50 per share and your net worth at the end of the year would be $11,000.
Meaning your net worth is down by 45% since before the crash.
However, if you had been investing the same $1,000 per year into the same $100 stock but
for only one year, you would only have 10 shares before the start of the crash and those
shares would be worth $1,000.
Then the market drops 50% and you invest your $1,000 and buy 20 shares at $50 per share
which gives you a total of 30 shares worth $50 each or an investment net worth of $1,500.
So you're up 50% year-on-year, despite the crash because you're buying low while the
investment is effectively on sale and because the amount your investing, in this case, the
$1,000 per year, is still a sizeable percentage of your net worth.
And we see this mathematical phenomenon play out in each scenario, with the largest percentage
drops in John's personal net worth getting closer and closer to what the market actually
dropped, but never quite getting there because he's recovering some of his losses by buying
more shares when the market is low and the time to recovering his personal net worth
getting longer and longer, but again not ever becoming quite as long as it took for the
market itself to recover.
In fact, in the crash of the 1970's, even when John had been investing for 20 years
before the crash started, he still only takes 48 months or 4 years to recover his personal
net worth compared to the 91 months that it took the market to recover.
And we see this pattern continue into the Dot-Com Crash.
The Dot-Com crash began in August of 2000 when the S&P 500 reached a peak of $1,517.68
after a phenomenal run through the 1990's before dropping to a low of $815.28 in September
of 2002.
That was a total drop of about 46.3% and it would take the market nearly another 5 years
to fully recover and set a new record high of $1,530.62 in May of 2007, not that it ended
up lasting long as we now know.
In total, this Market cycle lasted for 81 months or about 6 years and 9 months but the
numbers for John look fairly similar, if not a little better than they did during the crash
of the 1970's.
As you can see the months to recovering his personal net worth are a little longer during
the Dot-Com crash, in part because it took quite a bit longer for the market to reach
its lowest point than it did in the 1970's, but compared to the crash of the 1970's
it was a much slower climb back to the top of the market.
For instance, once the market got to the point where it lost 40% of its value, it took 9
full months to get back below that 40% loss mark and another 7 months to get past the
30% loss mark.
The point I'm trying to make here is that once we got to the low point of the market
during the Dot-Com crash, we stayed pretty close to it for a long time!
That means that we had many opportunities to buy our investments when they were on a
huge sale and that's why you see such a big difference in the net worth figures at
the point when the market recovers during this crash compared to the crash of the 1970's
and also as you can see on your screen now, the housing crisis.
The housing crisis or the great recession began in October of 2007 when the S&P 500
reached a peak of $1,549.38 before dropping to a low of $735.09 in February of 2009.
That was a total drop of about 52.6% and it would take the market another 4 years and
1 month to fully recover and set a new record high of $1,569.19 in March of 2013, which
has been the bull market that we have basically been riding ever since.
In total, this Market cycle lasted for about 5 years and 5 months and as it turns out,
it performed much like the crash of the 1970's when it comes to the numbers, just with a
bigger drop from the top of the market to the bottom and a shorter cycle of recovery.
As a result, the numbers look pretty similar.
WHAT YOU CAN DO: But that's kind of the point, isn't it?
We've already covered how most market crashes don't last much more than a few years, but
as we see now, even the ones that do can be managed to a certain degree, by just staying
the course and continuing to invest.
This is especially true if you've only recently started to invest, or even if you've just
now started to invest.
So it's October 26th as I'm recording this audio and the market has been stumbling
for most of October with the S&P 500 being down nearly 10% from it's all-time high
that was set in late September and on the off-chance that the market does experience
a crash in the near future I figured it would be good to have this video in my log as a
follow up to the last one to help remind us that even in the bad times we can do fairly
well.
After all, as I said, when the stock market crashes it's like we're buying everything
on sale and when the time comes that things aren't on sale anymore we'll see our net
worths skyrocket.
That's the takeaway I want you guys to get from this.
From an investing perspective, stock market crashes are not a bad thing.
And don't ever let the fear of one happening keep you from investing in the first place.
Really the worst thing that could happen to you during a stock market crash is losing
your job and not being able to get another one.
And if that's something that worries you, I know, believe me, I've been there, then
there are a few things that you can do.
First is to obviously build up your emergency fund, another, like we discovered in my last
video on these market crashes is to invest more into the market during crashes while
you still can, but yet another option that not enough people take advantage of I feel
is to diversify your income streams.
Now, I don't know if that's just because people aren't sure how to do it or if they
just feel that they don't have the time to do it or what the reason is, but I would
highly recommend looking into it.
Heck, I could even start making videos on the subject, I've been working on diversifying
my revenue streams for nearly the past 2 years now and it's really taken a lot of stress
off my shoulders and I think that it could for lots of other people as well.
I mean, even an extra $100 or $200 a month could really help speed up our abilities to
pay off debt, or invest and retire early, or even just have some extra fun money.
Would that be something that you guys would be interested in?
It obviously wouldn't replace these finance videos, I'd still do these like normal,
but I could do the other videos in addition to the regular content and I think that it
would help round out the channel because thus far I've only really focused on one side
of the financial equation which is the side where you're saving money through paying
off debt and budgeting, but there are two sides to the equation.
There's finding ways to save money and there's finding ways to make money.
Anyway, I'm rambling on too long here, let me know in the comments section below if that
would be a type of content that you'd be interested in watching.
But that'll do it for me today once again if you enjoyed this video be sure to subscribe
and hit that Bell next to my name so that you'll be notified of all my future uploads.
I generally upload every single Monday, and if you have a friend that would be interested
in this kind of content be sure to share it with them and let's really get this information
out there and start our own Financial revolution.
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