As they old saying goes, “those that do not study the past are doomed to repeat it” and, in the case of a stock market crash, you can also lose a lot of money in the process.
By studying the history of stock market crashes you can familiarize yourself with the causes and effects of market crashes, and better position yourself to ride out volatility and even profit from these events. It is crucial to learn the circumstances leading up to these events, and how to tell a bear market from a market crash in order to realize gains and hedge against risk.
It can also be a comfort to see that historically, the market has rebounded from some staggering losses, and long term investors have realized gains with buy-and-hold strategies.
History Of Stock Market Crashes: What Is A Stock Market Crash?
A broad-based and rapid decline in stock prices in a short amount of time is considered to be a market crash. While there is no specific number associated with a crash, it is normally considered a double-digit percent decline in the Dow Jones Industrial Average and the other major indexes within a period of a few days.
In the history of stock market crashes, often these declines are preceded by a market bubble – or a rapid, speculative increase in stock prices. The longer and more intense the bubble, the more painful the ensuing crash.
Characterized by a combination of fundamental concerns and panic selling, a market crash can seem to occur suddenly, and result in the staggering loss of paper wealth. Few investors have the wherewithal to ride out the dramatic downturns, and end up selling at the worst possible time. This is where an investor needs nerves of steel, and a solid game-plan.
Brief History Of Stock Market Crashes: 1929-2008
Fortunately, the history of stock market crashes has been brief in the last century, but that has not meant that the few that have occurred have not been painful. It would have taken super-human strength to watch the major markets shed a staggering 90% from their highs, and still have faith in the markets.
In the stock market crash of 1929, and the subsequent 1930s crash that is exactly what happened, ending a decade known as the Roaring Twenties, and spiraling the country into the worst financial crisis of the modern era, the Great Depression.
The stock market crash of 1929 is a cautionary tale of the dangers of investing on margin, as the market crash is attributed to the forces liquidation of stocks due to margin calls.
In 1987, a market that was perceived to be over-extended fell victim to panic selling, and fell 22% in one day. Program-trading assisted in the chaos, as investors ran for the exits all at once further perpetuated the psychological phenomenon.
Diversification, planning and patients are the keys to successfully navigating a market crash such as this.
The collapse of the real-estate market and the subsequent fall of the banking system due to over-leverage and over-exposure to risky financial instruments caused the stock market crash in 2008.
Irresponsibility on the part of major financial institutions in dealing with new investment instruments such as Mortgage-Backed Securities led to the demise of Bear Stearns and Lehman Brothers, as well as countless banking and financial institutions.
The lesson to be learned from this financial crisis is to understand fully what you are investing in, and to shy away from anything you do not fully understand. You should always thoroughly research all potential investments and understand them fully prior to committing any capital.