We’re watching history unfold. Over the past few weeks, we’ve seen fear from the Covid-19 pandemic deliver a huge blow to our economy and trigger a stock market crash. It reminds us that the market is a living and breathing thing that reacts to the world—and what’s happening in it.
I want you to be informed about what’s going on, but at the end of the day, worry will only cause harm, not good. In the middle of chaos, we must focus on what we can control: our attitude, our outlook and our actions. Be wise. Don’t panic. Our economy is strong, and it will recover.
Let’s go over the basics of what a stock market crash is and how you can protect yourself and your family as we move forward.
What Is a Stock Market Crash?
A stock market crash is a sudden and significant drop in the value of stocks, which causes investors to sell their shares fast. When the value of stocks goes down, so does their price—and the end result is that people could lose a lot of the money they invested.
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To get an overall measure of the value of stocks, we look at indexes like the Dow Jones Industrial Average (DJIA), the S&P 500, and the Nasdaq. If you look at the visual representation of one of these indexes, you can see why we use the term crash. It’s like watching a plane take a nosedive.
Previous Stock Market Crashes: Examples From History
We’ve been here before, people. The market has gone through many extreme ups and downs. When we look back at history, we’re reminded that yes, a market crash is a very difficult thing to go through, but we can and will overcome.
- The Great Depression (1929): Over the course of a few days, the DJIA dropped 24.8%.1 It took a little over a decade for the economy to get back to pre-depression levels. Industry from World War II helped get things back up and running.
- The Stock Market Crash of 1987: The market lost 22.6% of its value in one day known as “Black Monday.”2 But within two years, it had recovered everything it had lost.3
- September 11, 2001: Terrorist attacks in our country caused a major nosedive in the market. But it corrected itself quickly: Just two months later, the stock market had returned to September 10 levels.4
- The Great Recession of 2008: The Dow Jones lost about 50% of its value in a very short time.5 However, after a couple of years, the market was stronger than ever before—we were essentially in a bull market from 2009 to just a few weeks ago.
So, keep your head up. Many of you have already lived through the huge market crash in 2008 that triggered a recession. Some of you are experiencing a crash for the first time—at least as an adult. But we’ve recovered before, and we’ll recover again.
What Causes a Stock Market Crash?
A market crash is caused by two things: a dramatic drop in stock prices and panic. The coronavirus pandemic has caused many people to lose confidence in the immediate future of our economy, so they sold off their stocks, causing stock values to drop like a rock.
Here’s how it works. Stocks are small shares of a company, and investors who buy them make a profit when the value of their stock goes up. The value (and therefore the price) of those stocks is based on how well investors believe the company will perform. So, if they think that the company they’re invested in is headed for hard times, they sell that stock in an attempt to “get out of it” before the value drops entirely.
The reality is, panic has just as big of a role to play in a stock market crash as the actual economic factors that bring it about.
Let me give you a recent example from the coronavirus pandemic that shows you how powerful panic is. As news of the virus spread, grocery and convenience stores all across the world sold out of toilet paper in a matter of days. Was there a toilet paper shortage? Well, yes and no. There wasn’t a shortage before people started panicking. But when people lost their minds and started stocking up on toilet paper, their actions created a shortage!
The same kind of panic can trigger a stock market crash. Once investors see other investors selling off their stocks, they get nervous. Then, stock values start to dip, and more investors sell their shares. Next thing you know, everyone is dumping their stocks, and the market is in a full-fledged crash.
My point is this: The stock market’s value is based entirely based on perception and prediction of the future. No wonder it feels like a roller coaster ride!
Are We Experiencing a Coronavirus Stock Market Crash?
Yes—by all accounts, we’re seeing a big crash due to the coronavirus. There’s no doubt that COVID-19 is delivering a huge blow to the economy. The Dow Jones has fallen by a third since it reached an all-time peak in February of 2020.6
Will the coronavirus crash trigger a recession?
Let me be clear about something: A stock market crash and a recession are not the same thing. The stock market crashes when investors lose confidence in the future of the businesses they’re invested in and decide to sell their shares to keep from “losing money.” But a recession happens when there’s an economic downturn for two consecutive quarters (six months). The gross domestic product (GDP)—an overall measure of how much wealth we’re producing as a country—needs to decline for six months before we can categorize this time period as a recession.
Of course, a market crash can absolutely trigger a recession. But no one can predict the future. Many factors—including the government’s intervention, how long we’ll be dealing with widespread COVID-19 cases, and consumer confidence—will prove whether we’ll bounce back quickly or if we need to prepare for a recession.
What to Do During a Stock Market Crash
Yes, it’s scary. Yes, you’ll have to make some adjustments. But with the right plan to move forward, I know that we can and will get through this. Here are five ways you can brace for the crash:
1. Refuse to panic.
As we talked about before, panic can make the crash just as bad as the actual economic hurdles we’re facing. Don’t fall for it. Dealing with the unknown creates uncertainty, and uncertainty left unchecked can become fear. No one knows exactly when this will end, and it would be absurd to try to predict it. However, we can choose to stay clear and positive with our thoughts.
2. Go into conserve mode.
You can’t control how Congress makes their budget, but you can control how you make your budget! Now’s the time to cut out all unnecessary spending of any type. Cancel your gym membership and don’t even think about having an online shopping spree! Meal plan to save money. Use up the food that you have in your pantry and freezer before you go out and buy more.
Focus on funding the Four Walls before anything else:
Protect yourself and your family. Tighten the budget and hang in there. This won’t last forever.
3. Follow the proven plan.
If you’ve been laid off during this crisis, let me first say that I’m so sorry for what you’re going through. This is a tough time to be without a job. If your income isn’t guaranteed, you need to make some adjustments. Pause paying extra toward debt right now, but keep your “focus forward” mindset. Save up extra money to fund your Emergency Fund, and when this passes—and it will pass eventually—then you can start back up and pay extra on your debt.
4. If you’re investing, stay invested.
If you’re on Baby Step 4, keep investing 15% of your income. Lots of people are tempted to cash out their 401(k) or mutual funds before they “lose any more money.” But if you pull out now, you guarantee a loss. Stay plugged in and ride it out to give your investments more time to grow and recover.
The most basic principle of investing is to buy low and sell high. When stock prices dip this low, I want you to think of it as buying on sale! Don’t try to time the market. Focus on time in the market.
5. Meet with an investment professional.
If you haven’t already, schedule a call with your investment professional. You need specific advice for your situation—your funds, retirement accounts, your age, and which Baby Step you’re on. Ask your pro if you need to make any adjustments right now in response to the crash. Don’t be afraid to share what’s on your mind. If you’re married, make sure your spouse is on the call! Make a plan for how you’ll move forward together.
And by the way, if you’ve been playing the investment game solo, now more than ever you need to connect with an investment professional!
Remain Calm During the Stock Market Crash
Choose to be patient and think long term. It will take time for us to know what’s happening with the market.
We’re dealing with a brand-new unknown enemy with the coronavirus pandemic. But I want to remind you of the things that we know! We know that we care about our families, our dreams and our futures. We’ll all do a much better job of that if we stay positive and focus on the factors that we can control. We will get through this together.