Dealing with Stock Market Crashes

May 17, 2018

Investing, Stocks

More and more frum families are using the stock market to save for simchas, retirement, or simply to build wealth, BH. Often, they jump into the ever-popular S&P 500 index fund when recent performance gives them the confidence to do so. This confidence is then tested, sooner or later, by sharp declines in portfolio values. Whether it’s a Trump trade war, the outbreak of COVID-19, or sometimes for seemingly no reason, news headlines are suddenly blaring about the massive declines of the “market” and America’s 401(k) balances.

What is a Regular Yossi, who’s far too busy to truly understand macro-economics and Wall Street jargon, to make of these crashes? Does a crash mean the stock market is broken or flawed? Should they sell until the storm subsides? All of their assets? Some? Am I to wait till things get worse and then sell? These are natural and intuitive questions, but the answer is probably not.

Volatility Is Normal

If your teenage child smiled all day for four weeks straight, you’d probably get a bit concerned. Financial markets, like well-functioning people, have occasional ups and downs, so a dip in the market after a while in which it went straight up is actually a sign that the market is functioning correctly. In fact, the potential for losses is what justifies the impressive gains long-term stock investors have enjoyed for centuries. So, while sudden sharp declines in the stock market make for good headlines, they usually mean a lot less than you would think.

Since 1900, the stock market has declined by 5% or more about three times a year and by 10% or more once a year or so, only to bounce back within a few weeks or months. Since this kind of volatility is usual, a well-diversified investor can (and should) safely ignore the hubbub about these ongoing price fluctuations. Just as your teen being a bit glum is not a big event, neither is the market’s occasional 10% pullback.

Constant Panic: A New Fad

The panic over every jitter in the stock market is a relatively new fad. Not very long ago, most investors would get market updates once a quarter, when they received their brokerage statements in the mail. More hands-on traders would subscribe to the Wall Street Journal, which allowed them to check up on their stocks daily.

In today’s smartphone era, even supposedly long-term investors can quickly become obsessed, glancing at every instantaneous flicker of the Dow or S&P 500. In turn, for many, stock investing is no longer about sharing in the persistent growth of a solid business but a quick gamble on the current direction of prices. This shallow mindset causes people to lose perspective on whether or not the market is truly doing well.

Riding Through a Great Crash

But maybe this downturn will worsen significantly, and it’s not a short-term dip? Even if reported softening signals the beginning of a prolonged market crash, as long as an investor is diversified correctly and isn’t forced (by financial pressure or panic) to become a seller in the down market, they will be fine. While stocks can lose a tremendous amount of their value in the short run, a diversified portfolio of stocks is a surprisingly solid investment over time.

Consider the Great Depression, the worst economic collapse in US history. Investors who held on through the terrible downturn made very handsome returns. After factoring in dividends and inflation, well-diversified investors in the 1930s regained their losses within about four years, even though the US stock market was down by almost 90% at one point! While it was a wild roller coaster ride, the stock market showed excellent long-term profits through even that most difficult period.

Still, Why Not Jump Off?

You’re probably wondering, though, if the market may fall further, why not get out of the market now, when it looks wobbly, and buy back in after things stabilize? Won’t long-term returns be much better if you only got the upward price movements of the market and avoided the scary falls?

The answer is, yes, of course, avoiding all the bad and getting all the good would produce phenomenal returns. Unfortunately, even the world’s top investment experts have minimal ability to jump in and out of the market at just the correct times. Although the stock market has consistently had excellent long-term prospects, anything can happen in the short run. Therefore, by trying to avoid the ongoing fluctuations, it’s probable that you will forgo most of the market’s rewards as well.

Not convinced? Consider this amazingly valuable chart, courtesy of JP Morgan Asset Management. The bars show what the stock market earned each year. The red dots show the worst fall investors experienced during those same years.

The US stock market earned an average annual return of 10.6% from 1980 to 2025. If you include dividends reinvested, $10,000 compounded into $1,558,070 over that period ($381,007 adjusted for inflation).

(You can play with a nifty S&P 500 calculator here to see.)

But almost no years earned a steady 10.6%. Some years were far better and others far worse. Also, even though returns were excellent over the long run and were positive in 34 out of 45 years, the average fall each year was 14.1%. So you had to accept significant volatility, even during the years that ended with solid returns.

Note how some of the years with the WORST inter-year drops, such as 2009 and 2020, ended up showing huge positive returns! If you got out because the market fell, you lost much of the growth. So, unless you have a crystal ball telling you EXACTLY when to get in and out, you’ll never get the benefits of the upside without the downside. No one has that magic system, though everyone wishes they did.

Stocks Are Not for the Fainthearted

The highlight of many amusement parks, such as Six Flags Great Adventure, is the massive roller coasters with their intense speeds and crazy twists. While many people find these coasters thrilling, they can be unpleasant or even unsafe for others. Every amusement ride features signs announcing restrictions based on height, medical condition, and/or tolerance for being flipped and zipped in all different ways. When someone ignores the warnings and has a bad time riding, it makes no sense for them to blame the roller coaster.

So too, every high-potential investment comes with the warning that there is a tendency for sudden, drastic collapses in price. If you can’t handle these financial drops and loops, you’re on the wrong ride!