What We've Learned from 150 Years of Stock Market Crashes

https://www.morningstar.com/economy/what-weve-learned-150-years-stock-market-crashes

by metdos • 1 year ago

73 92 1 year ago

morningstar.com

bell-cot• 1 year ago

Subtitle:

Though they varied in length and severity, the market always recovered and went on to new highs.

True. But that only works if the nation itself recovers and goes on to new highs.

etchalon• 1 year ago

It's also only true until it isn't.

cjonas• 1 year ago

Ya I think the past it felt as if the US was sharing in a global recession. This time it feels self inflicted and US Hegemony may be a thing of the past. If the dollar is no longer the world's reserve currency, I'm not sure how easily we'll be able to recover...

lucianbr• 1 year ago

I really don't understand the subtitle, and the argument implied, which countless people make. Do they really believe new things can't happen?

"This thing has lasted for X years so it can't fail now". Wha...? I mean, maybe it will not fail, but not for the reason that it has lasted this much. Everything has an end, and things not observed before do happen.

If anything, what we can learn from the last... any period really, is that something unexpected will happen.

Analemma_2• 1 year ago

Though they varied in length and severity, the market always recovered and went on to new highs.

Not in Japan it didn't. If you bought a Nikkei 225 index in December 1989, your returns are negative to this day (apart from a very brief breakeven in 2024): that's 35 years and counting of the market not recovering and going on to new highs. And Japan's experience is probably going to become the norm rather than the exception, now that everwhere else is catching up to it demographically.

"The market always goes up in the long run" was an adage for a world of steady population and productivity growth, which is not the world we have now.

throw0101c7• 1 year ago

Not in Japan it didn't.

Only if you were 100% JP equities without any diversification: if you had some (20%?) bonds (and rebalanced), or had an international equities (and rebalanced), you were probably fine.

* https://www.bogleheads.org/blog/2017/02/06/a-short-study-of-...

* https://www.gocurrycracker.com/lessons-from-japans-lost-deca...

Using Portfolio Charts withdrawal rates calculator, which uses data going back to 1970, a Japanese investor (experiencing Japanese inflation and spending Yen) with a 60% allocation to Japanese stock and 40% allocation to intermediate-term Treasuries had a 30 safe withdrawal rate of 3.2%.

* https://www.bogleheads.org/forum/viewtopic.php?t=306752

Even the (S&P 500) had ten years of zero returns, and the only thing that would given a US domestic investor positive results was a bond component (and rebalancing):

* https://www.forbes.com/sites/advisor/2010/09/13/its-not-real...

Analemma_2• 1 year ago

Real interest rates in Japan were zero or negative for pretty much all of that same 35-year period, so bonds wouldn't have helped you either. And "you were up if you bought international equities" kind of proves my point: if Japan is the harbinger for the rest of the world, there will be no more "always up" markets to flee to.

throw0101c7• 1 year ago

A popular post that is often given to folks who are freaking out about drops in their portfolio:

* https://awealthofcommonsense.com/2014/02/worlds-worst-market...

And for those who want to sit on the sidelines, that's usually not a good idea:

* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...

The main folks that do have to worry about their portfolio are those who are about to retire, and those that have just retired, but there are strategies for that (against sequence of return risk):

* https://www.kitces.com/blog/managing-portfolio-size-effect-w...

tylerflick• 1 year ago

People about to retire shouldn’t be that exposed anyway. Target day funds exist for a reason.

dkarl• 1 year ago

A lot of people plan on living twenty years past retirement and leaving some behind for charities and/or younger relatives.

wintermutestwin4• 1 year ago

Target day funds exist for a reason.

Yes - to make a lot of money on the expense ratio.

I guess if you really didn't want to learn a damn thing about modern portfolio construction a taget date fund is your best bet. However, it is incredibly easy to buy 4-6 ETFs that give you the same thing at a lower cost. Yes, you have to do a little work to re-balance these funds, but that is also an advantage to this approach as you have control over the re-balancing and can do it in a way that is more tailored to your specific situation.

I highly recommend the Risk Parity Radio podcast.

throw0101c7• 1 year ago

People about to retire shouldn’t be that exposed anyway. Target day funds exist for a reason.

Most research about safe withdrawal rates finds having 50-75% equities is necessary for retirement periods of thirty years:

* https://en.wikipedia.org/wiki/William_Bengen

* https://en.wikipedia.org/wiki/Trinity_study

* https://en.wikipedia.org/wiki/Retirement_spend-down

Of course you could have less, but then your initial withdrawal rates becomes quite low, and so you need a much large portfolio to begin with: this would mean much more saving and much less spending (i.e., enjoyment of life) during your working life.

ebiester• 1 year ago

There are a fair number of us not worried about the drop in our portfolio as much as we are worried that the current decisions will decrease the world's willingness to invest in American companies and markets permanently.

What if your hypothesis is that the fundamentals have changed?

wiredfool2• 1 year ago

So far, this is a minor stock correction coupled with unprecedented political uncertainty.

In my lifetime, there have been multiple -10+% single day drops, one -22%, and a bunch of -10% months. In that time though, no one has questioned the full faith and credit of the US government.

However now -- The Supreme Court had to take a case to rule that the government had to pay contracts that had already been delivered on. The Treasury has yoinked money from NY State over ACH because DOGE disagreed with the program. Musk and DOGE are trying to break departments so hard that there's no putting them back even with a court order. He's threatening Social Security, which has always been the third rail.

The trouble is that some form of stability and law is required for the sort of financial business that powers the US. There are other ways of being rich -- patronage, extractive, but that's not an engine that drives financialization and the ability to start business, get investments, and generally get some return back out of things. You lose the stability and the trustworthiness, the goose goes away, and there are no more golden eggs.

torlok2• 1 year ago

Buy a world index that's not over-weighted on the US or spread your money around region indices. Keep dollar-cost averaging. Stop believing you'll get more than 3-4% yearly returns above inflation. My only real strategy change as a European was to move my money to European ETF providers away from Vanguard and BlackRock because at this point you never know what the US government is going to cook up next, and to weigh more on Europe and Emerging Markets.

throw0101c7• 1 year ago

What if your hypothesis is that the fundamentals have changed?

There's been recent research on survivorship bias in market returns, especially with regards to the US:

Using international data, we quantify the magnitude of survivorship bias in U.S. equity market performance, and find that it explains about one third of the equity risk premium in the past century. We model the subjective crash belief of an investor who infers the crash risk in the U.S.~by cross learning from other countries. The U.S. crash probability shows a persistent and widening divergence from the implied global average. We attribute the upward bias in the measured equity premium to crashes that did not occur in-sample and to positive shocks to valuations resulting from learning about the probability.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3689958

* https://www.youtube.com/watch?v=1FwgCRIS0Wg

I'm Canadian, so I have a different home market, but that is correlated to the US economy (cf. tariffs), but my portfolio (TSX:VGRO) also has non-US/CA equities.

xtiansimon• 1 year ago

“…fundamentals have changed?”

I news interview today suggested the tariffs were a new “equilibrium”.

darth_avocado2• 1 year ago

Anecdotally, DCA is a worse strategy when you’re doing it on the way down. Market sentiment is important. Buying on the way up is more important, and so is selling on the way down. Take profits when you can, and buy back in when the sentiment improves. It’s a better strategy than investing while the market continues to drop.

didntknowyou• 1 year ago

you can't really compare regular drops to the current drops triggered directly by trump. the current situation is unique.

losvedir• 1 year ago

Hm, interesting article but I wish they had included global data as well. For example, stock market crashes in Japan and other countries. As I understand it, Japan still hasn't quite recovered from its crash more than 30 years ago.

xvilka• 1 year ago

Mostly because of the restrictive Plaza accord[1] and tariffs[2].

[1] https://en.m.wikipedia.org/wiki/Plaza_Accord

[2] https://edition.cnn.com/2019/05/24/business/us-china-trade-w...

actionfromafar3• 1 year ago

Tariffs... sounds familiar.

bryanlarsen3• 1 year ago

The US stock market has been an outlier for the last 150 years. Predicting that the US stock market will be an outlier for the next 150 years seems unlikely. A better predictor is likely global stock market performance, which leads to a much less rosy prediction.

uptownfunk• 1 year ago

People say not to time it but if you took your profits December ish you’re probably much happier than if you had lost everything since then and reset to 6-12m ago unless you’re playing the short. There is a premium on mental health and market volatility.

MilnerRoute2• 1 year ago

Since December the S&P 500 is down... 4.10%. It's a small loss, but I don't know if people who cashed out in December are really that much happier.

Especially since for the last 12 months the S&P 500 is still up nearly 10%.

charlie0• 1 year ago

Even at 6 months it's still in tbe green at ~2%. DCA and buy the dip.

Arete3141592• 1 year ago

I don't think the problem is the paper losses so far. The problem is the entire social contract...or I don't know what to call it -- governmental contract? Financial world contract? Is on fire.

wintermutestwin4• 1 year ago

There is a premium on mental health and market volatility.

I find that, as soon as I pick up the crystal ball and try to play the prediction game, my mental health suffers greatly. What helps my stress levels the most is to have a portfolio that is well diversified (e.g. a risk parity style portfolio) and stay the course because the portfolio has elements that go up when equities go down.

At the end of the day, the markets can be blatantly irrational (see TSLA) for wildly variable time spans - this means that market timing is inherently gambling. Gambling with your retirement portfolio is incredibly stressful.

skippyboxedhero5• 1 year ago

Risk parity got obliterated a few years ago. Risk limits were breached multiple times over on these strategies.

Thinking that you are taking a safe option is a lie you tell yourself when you want to take the lazy option: just copying what you read in some book. It isn't safe, risk-party isn't diversification, you are still gambling.

Btw, this was predictable too...the idea that bonds/equities wouldn't be correlated was clearly historically contingent based on the very recent past. It was very clear that massive financial stimulus significantly increased the risk of equities/bonds correlation going to one, it was a topic considered throughout the 2010s when people were trying to sell these funds and trying to devise ways to generate negative correlation. The problem was that lots of people were moving a lot of product based on this correlation continuing.

deadbabe• 1 year ago

If you took profits in December you would have watched the market continue to climb and it’s entirely possible instead of tanking right now it could have kept going and you’d just be watching it everyday go up and up.

Don’t time the market unless you know something others don’t. Just don’t.

Pigalowda• 1 year ago

US giving up its place after 80 years so the gerontocracy can still feel relevant and in charge is a black swan event. We’ll correct to 30% of current value and trade sideways for 20 years.

Regular people talking about making money while giving up the world order? Rofl. You’re not in the club! Carlin already told you that.

wolfie69• 1 year ago

She writes like she has 5 years of experience.

HumblyTossed2• 1 year ago

what does this even mean?

ram_rar• 1 year ago

While dollar cost averaging and index investing are solid strategies, this article overlooks an important consideration: the Realistic Rate of Return (RoR) needed for retirement planning. Yes, US markets historically recover (lately that notion seems to be challenged more often than not), but timing matters significantly.

What happens if someone's retirement coincides with a market crash? Younger investors have time on their side for recovery, but as retirement approaches, blindly following market-based strategies without carefully considering your required rate of return could be problematic. Age-appropriate risk management becomes increasingly important as your investment horizon shortens.

exe34• 1 year ago

surely as retirement approaches, you should be taking money out of your investments so that you can either live off those (and traditional savings interest) or investing in safer things like real estate?

3170702• 1 year ago

Meet Bob.

Bob is the world’s worst market timer.

https://awealthofcommonsense.com/2014/02/worlds-worst-market...

UncleMeat3• 1 year ago

The bob scenario is educational, but isn't relevant here. The reason why bob is still fine is that the crashes all happen during the accumulation phase. What you don't want is a crash right as you retire, causing you to rapidly liquidate a much larger portion of your savings than expected.

bryanlarsen3• 1 year ago

Bob also picked the best stock market to invest in. He would have done a lot worse investing in any other stock market. It's not surprising he did well, he picked the winner.

What are the chances the US is going to have the best stock market over the next 50 years? It's possible, but doesn't seem likely.

nine_zeros3• 1 year ago

Age-appropriate risk management becomes increasingly important as your investment horizon shortens.

As you appear closer to retirement, make sure you invest in Bonds or other fixed income. It won't beat inflation but it will prevent you from draw-downs exactly when the market is down.

velcrovan4• 1 year ago

Call me crazy, but since the DOGE hatchet-wielding started, I've redeemed all my US bonds. I just don't have confidence that the people needed to keep TreasuryDirect running will still have their jobs if/when I need to redeem them in the future.

RivieraKid• 1 year ago

Even a high-yield savings account should beat inflation on average. Such account has an interest rate similar to the Fed rate which is set to be above the expected inflation in normal economic conditions when the Fed is neither supporting nor slowing the economy.

darth_avocado2• 1 year ago

You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s). You shouldn’t be really relying on selling assets to pay your monthly bills.

throw0101c7• 1 year ago

You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s).

Just before and just after retirement it's considered a good idea to go bond heavy to help mitigate sequence of returns risk:

* https://www.kitces.com/blog/managing-portfolio-size-effect-w...

* https://www.schwab.com/learn/story/timing-matters-understand...

* https://www.td.com/content/dam/tdgis/document/ca/en/pdf/insi...

xnx• 1 year ago

While dollar cost averaging and index investing are solid strategies

Dollar cost averaging is a psychological strategy, not a financial one.

"The costly myth of dollar-cost averaging": https://web.archive.org/web/20050910142530/http://moneycentr...

"Debunking the Myth of Dollar Cost Averaging": https://news.ycombinator.com/item?id=36271061

stvltvs• 1 year ago

Doesn't that assume that you're sitting on a pile of cash already and deciding how to invest it? That's not the situation for working class investors who didn't inherit a lump sum or win the lottery.

The optimal strategy for most retirement savers is "invest it as you get it" which is basically dollar cost averaging except in the rare cases when a pile of cash falls in your lap.

sfblah• 1 year ago

For years I've been reading commentators tell me that QE completely and permanently changed the nature of valuations in US markets. Now, perhaps, we'll finally get to see whether that's actually true or not.

If they're right, no sweat. If they're wrong, a recession will trigger a substantial downward revaluation of assets. For a picture of what that might look like, I suggest reading John Hussman's market commentaries, available free online.

MilnerRoute2• 1 year ago

Wait a minute... The S&P 500 just started spiking back up about 20 minutes ago. It's still down 2.46% for the day -- but that's a much smaller number than the drops reported this morning.

Maybe the real question is: What have we learned from the last 150 minutes?

DebtDeflation2• 1 year ago

SP500 is down like 8% from the ATH, which BTW was less than 3 weeks ago. People need a little perspective. I lived through the GFC and the Dotcom bust, this is nothing (so far).

skippyboxedhero5• 1 year ago

Neither of those events were anything either.

Stock markets go to zero. Capitalism is disruptive and politically unpopular (the US pumps technology into the rest of the world and the US is still the exception, other countries know it works...they just don't care). Even in the US, which is the best case, you have had decades of underperformance. A 50% dip that fixes itself quickly is nothing, the US is the best case of the best case.

Btw, the original article also misses everything relevant about humans operate. During Covid, one of the FT economics columnists, a person who still makes a very healthy living from giving advice about human behaviour said that he sold his stocks, the volatility was too much, there were problems in his personal life, etc. Wiped out decades of gains in an afternoon (and was happy about it). Herding is going to, eventually, result in an almighty fallout. Risk-adjusted return from equities was already low...and this was before all barriers to entry were removed.

DebtDeflation2• 1 year ago

It's a fair point. And even short of "going to zero" the Nikkei didn't recover its 1989 high until last year. 35 years is a long time to get back to breakeven.

lysace• 1 year ago

From a ROTW perspective (I think we tend to own US tech stocks): The USD is also crashing. Double whammy.

dgellow• 1 year ago

The USD-EUR decline of the past week has been brutal, for sure :(

rawgabbit2• 1 year ago

If we look at the article's worst five crashes:

      1. 1929 Crash & Great Depression
      2. Lost Decade (Dot-Com Bust & Global Financial Crisis)
      3. Inflation, Vietnam, & Watergate
      4. WWI & Influenza
      5. Great Depression & WWII

Regarding the Great Depression (#1,4,5). The story that is often overlook according to the historians I have read is how the lack of a Federal Reserve and FDIC contributed to the Great Depression. As there was no Federal Reserve, little regulation, and no FDIC deposit insurance... when banks failed all of their customers became financially penniless. The reason why many of those banks failed was that they were at the "edge" already due to farmers taking out massive loans during WWI as American grain was in demand and when the war ended, many of those loans went bad. When the stock market crashed, that was the straw that broke the camel's back. If we had a Federal Reserve and FDIC back then, many of those issues could have been prevented.

#3 was a combination of the Arab Oil shocks and the Vietnam War dragging down the economy.

#2 is still a mystery to me. I don't understand how a speculative bubble was allowed to develop including the mortgage backed securities nonsense could trigger a decade long recession. I assume it was due to the repeal of https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...?

mholt• 1 year ago

Tangential question, as I am not an economist and don't pretend to understand any of this: what would happen if the stock market didn't recover? (Surely, it could happen? Past performance is no guarantee of future results.)

The economy would effectively collapse, and I imagine our currency would be mostly worthless. People would withdraw what they could from bank accounts, which wouldn't be able to produce all the funds, so FDIC insurance would kick in, effectively printing money, but the economy has collapsed anyway?

^ That's just my intuitive speculation. I can't really grasp the scenario of stocks never recovering. Anyone with some education/background have a good explanation? (Not sure I want to trust AI with this question.)

rawgabbit2• 1 year ago

I doubt the economy will collapse but you will see massive layoffs.

Many of the wealthiest people of the US officially have zero income and pay zero taxes. They learned they want to be paid in stocks and stock options. When they need cash, they found it was easy to get loans using their stocks as collateral. In other words, if the stock market permanently tanks, it will affect the top 0.1% and prevent them from doing their current tax avoidance scheme.

For most people, they will probably get laid off, as corporations' seemingly only answer to a falling stock price is to reduce get head count. In Japan's case with their stock market in the toilet for the past thirty years, it led to a bi-furcated economy. The lucky with regular jobs with full benefits; the unlucky with gig jobs with no benefits.

tim333• 1 year ago

Stocks represent ownership of companies and assets so at some point they become a bargain as you are buying assets and profit income cheap. For dividend investors permanently low prices would be good. They are quite expensive at the moment though.

aeblyve• 1 year ago

https://www.federalreserve.gov/econres/feds/files/2023041pap...

This exploratory federal reserve article argues that much of the recent (i.e. 1989-2019) gains were categorically the result of corporate tax cuts. Perhaps one way of examining the new DOGE initiative.

HumblyTossed2• 1 year ago

I'm about 15 years out. I think what would be worse for me is to have a dead decade where everything is just flat.

What We've Learned from 150 Years of Stock Market Crashes

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