Though they varied in length and severity, the market always recovered and went on to new highs.
When will the next bear market happen—and when it does, how long will it take to recover?
Stocks were approaching bear-market territory as recently as Monday, April 7, and forecasters across Wall Street were raising the odds of a recession happening in 2025.
It took the US stock market 18 months to recover from its most recent bear market—the downturn of December 2021, which was spurred by the Russia-Ukraine war, intense inflation, and supply shortages.
On the other hand, the covid downturn of March 2020 was a much faster cycle. Though the initial drop was dramatic, the market ultimately recovered in just four months—the fastest recovery of any market crash over the past 150 years.
These lessons also ring true when it comes to all other historical market crashes: Though they had varying lengths and levels of severity, the market always recovered and went on to new highs.
Look nobody wants to think about market crashes. It’s like planning for a natural disaster – we know they happen but we’d rather not dwell on it. But if you’ve got money in the stock market (which most of us saving for retirement do), you need to understand what really happens to your investments when things go south.
I’ve been watching the markets for years, and the panic during crashes is always the same. So let’s dive into what actually happens to your stocks during a market crash – and why you might not need to freak out as much as you think.
The Harsh Reality of Stock Market Crashes
Stock market crashes happen. Over the last century, America has seen multiple major crashes. During the Great Depression in 1929, stocks plummeted to a shocking 10% of their previous values. In the crash of 1987, the market nosedived more than 20% in just one day!
But what does this mean for YOU and YOUR money?
You Don’t Lose Money Until You Sell
This is the most important thing to understand. When the market crashes and your portfolio shows a big red number, you haven’t actually “lost” anything yet. What’s happening is the perceived value of your investments is dropping.
Here’s a simple example
Let’s say you bought 1,000 shares of a company for $1,000 total ($1 per share) Then the market crashes, and the share price drops 75% Your 1,000 shares are now worth just $250.
You have two options:
- Panic and sell – You lock in a $750 loss
- Hold steady – Your position is down, but you haven’t actually lost anything yet
If you don’t sell, there’s a good chance your investments will recover when the market rebounds. Historically, the stock market has always recovered from crashes over time. It might take months or years, but patience usually pays off.
The Real Ways Investors Lose Money in Crashes
1. Emotional Panic Selling
The biggest way most average investors lose money during crashes is by giving in to fear and selling at the bottom. I get it – watching your life savings seemingly evaporate is scary! But making emotional decisions almost always backfires.
When you sell during a crash, you’re essentially:
- Locking in your losses
- Missing the eventual recovery
- Converting a temporary decline into a permanent loss
2. The Margin Call Nightmare
Now we’re getting to the really dangerous stuff. Some investors use something called “buying on margin” – essentially borrowing money to invest. This can amplify your gains when markets rise, but it’s DEVASTATING in crashes.
Here’s a simplified example of how margin works:
- You borrow $999 from your broker at 5% interest
- You add $1 of your own money (yes, seriously)
- Now you’ve got $1,000 to invest
- If your investment returns 6%, you’ll get $1,060
- After repaying the loan with interest ($999 + $50 = $1,049)
- You’re left with $11 profit on your $1 investment (over 1,000% return!)
But what happens if the market crashes and your $1,000 investment drops to $100?
- You still owe the broker $999 plus interest
- Your investment is only worth $100
- You’ve lost your original $1 AND you owe $950+ to the broker!
This is exactly what happened to many investors before the Great Depression. They lost everything AND owed huge debts, which led to bank failures since brokers couldn’t recover the money. This is why the SEC now regulates margin trading.
What Market Crashes Really Mean for Long-Term Investors
For most people investing for retirement or other long-term goals, market crashes shouldn’t be catastrophic if:
- You’re properly diversified
- You don’t need the money right away
- You avoid selling in panic
- You’re not using excessive margin or leverage
In fact, many successful investors see market crashes as opportunities to buy quality companies at discount prices. Warren Buffett famously said to “be fearful when others are greedy and greedy when others are fearful.”
Historical Perspective: Markets Recover
Let’s look at some major market crashes and how long recoveries took:
| Crash | Market Drop | Time to Recover |
|---|---|---|
| 1929 Great Depression | 89% | 25 years |
| 1987 Black Monday | 22% | 2 years |
| 2000 Dot-Com Bubble | 49% | 7 years |
| 2008 Financial Crisis | 56% | 6 years |
| 2020 COVID Crash | 35% | 6 months |
As you can see, recovery times vary widely. The Great Depression was exceptional, but most modern crashes have seen recoveries within 2-7 years. The 2020 pandemic crash was unusually brief, with markets recovering in just months.
5 Smart Strategies to Protect Yourself During Market Crashes
1. Don’t panic sell!
This bears repeating. The worst thing most investors do is panic and sell everything during crashes. Take a deep breath. Remember your long-term plan.
2. Keep an emergency fund
Having 3-6 months of expenses in a safe, liquid account means you won’t be forced to sell investments at a loss if you face unexpected expenses during a downturn.
3. Avoid excessive debt and margin
As we’ve seen, using margin can be devastatingly risky. Most everyday investors should avoid it entirely or use it very conservatively.
4. Diversify properly
Don’t put all your eggs in one basket! Spreading investments across different:
- Asset classes (stocks, bonds, etc.)
- Sectors (technology, healthcare, etc.)
- Geographic regions
- Company sizes
This helps cushion the blow during market-wide selloffs.
5. Consider buying opportunities
If you have cash available and a strong stomach, market crashes can present incredible buying opportunities. Some of the greatest wealth creation has come from investing during major downturns.
Real Talk: The Psychological Impact of Market Crashes
We can’t talk about market crashes without acknowledging the emotional toll. Seeing your portfolio drop 30%, 40%, or more isn’t just a financial event – it’s psychological warfare.
I remember during the 2008 crash, I could barely look at my statements. It felt like watching years of careful saving just disappear. The fear is real.
But this is where having a plan BEFORE the crash happens is crucial. Decide in advance:
- What will you do if markets drop 20%? 30%? 50%?
- How much cash will you keep available for opportunities?
- What would trigger you to change your strategy?
Having these decisions made ahead of time helps prevent emotional decisions in the heat of the moment.
Stock market crashes are like storms – they’re going to happen, but you can prepare for them. Throughout history, markets have experienced painful downturns followed by eventual recoveries and new highs.
The key takeaways:
- You only realize losses when you sell
- Avoid buying on margin
- Keep a long-term perspective
- Don’t make emotional decisions
- See crashes as potential opportunities
At the end of the day, your success as an investor isn’t determined by avoiding crashes (impossible) but by how you respond when they inevitably occur.
I’ve been through several market crashes in my investing lifetime, and I can tell you that the feeling of doom and gloom during these times is always intense. It always feels like “this time is different” and the recovery might never come. But history shows us that patient, disciplined investors who stick to their plans almost always come out ahead in the long run.
What’s your plan for the next market crash? Do you have enough cash set aside? Are you diversified properly? These are the questions worth asking now, before the next storm hits.
Remember, in investing as in life, preparation is everything.
How Frequent Are Market Crashes?
The number of market crashes depends on how far back we go in history and how we identify them.
Here, we turn to data that former Morningstar Director of Research Paul Kaplan compiled for the book Insights into the Global Financial Crisis. Kaplan’s data includes monthly US stock market returns going back to January 1886 and annual returns over the period from 1871-1885.
In the chart below, each bear-market episode is indicated with a horizontal line, which starts at the episode’s peak cumulative value and ends when the cumulative value recovers to the previous peak. (Note that we use the term “market crash” interchangeably with bear market, which is generally defined as a decline of 20% or more. Also note that because this chart is informed by Consumer Price Index data, it does not fully reflect the most recent market movements. Still, the long-term trends hold.)
When you incorporate the effect of inflation, one dollar (in 1870 US dollars) invested in a hypothetical US stock market index in 1871 would have grown to $33,033 by the end of August 2025.
The substantial growth of that $1 highlights the enormous benefits of staying invested for the long term.
Still, it was far from a steady increase over that period. There were 19 market crashes along the way, with varying levels of severity. Some of the most severe market crashes have included:
- The Great Depression, which began with the crash of 1929. This 79% stock market loss was the worst drop of the past 150 years.
- The Lost Decade, which included both the dot-com bubble burst and the Great Recession. Though the market began recovering after the dot-com bubble burst, it didn’t climb back to its previous level before the crash of 2007-09. It didn’t reach that level until May 2013—more than 12 years after the initial crash. This period, the second-worst drop of the past 150 years, ultimately included a stock market loss of 54%.
- Inflation, Vietnam, and Watergate, which began in early 1973 and ultimately led to a stock market decline of 51.9%. Factors that contributed to this bear market include civil unrest related to the war in Vietnam and the Watergate scandal, in addition to high inflation from the OPEC oil embargo. This market downturn is particularly relevant to today’s environment, given issues like the recent inflation surge and the Russia-Ukraine and Israel-Hamas wars.
These examples demonstrate the frequency of market crashes. Though these events are significant at the moment, they are indeed regularly occurring events that happen approximately once a decade.
How to Measure the Pain of a Market Crash
How do you evaluate a market crash’s severity? That’s what Kaplan’s “pain index” measures. This framework considers both the degree of the decline and how long it took to get back to the prior level of cumulative value.
Here’s how it works: The pain index is the ratio of the area between the cumulative value line and the peak-to-recovery line, compared with that area for the worst market decline since 1870. That is, the crash of 1929/first part of the Great Depression has a pain index of 100%, and the other market crashes’ percentages represent how closely they matched that level of severity.
For example, consider that the market suffered a 22.8% drop around the Cuban missile crisis. The crash of 1929 led to a 79% drop, which is 3.5 times greater. That’s already significant, but also consider that the market took four and a half years to recover after that trough, while it took less than a year to recover after the trough of the Cuban missile crisis. So, taking this time frame into account, the pain index conveys that the first part of the Great Depression was 28.2 times worse than the Cuban missile crisis downturn.
The table below lists the bear markets of the past 150 years, sorted by the severity of market decline, and including its pain index.
As you can see, the market downturn of December 2021 (resulting from the Russia-Ukraine war, intense inflation, and supply shortages) ranks 11th on this list. By comparing this market crash to the other ones on the table, we see that the 28.5% stock market decline over that nine-month period was more painful for the stock market than the Cuban missile crisis and several downturns of the late 1800s/early 1900s.
And the covid crash of March 2020 was actually the least painful of these 19 crashes, due to the quick subsequent recovery. Though the downturn was sharp and severe (a 19.6% decline over roughly a month), the stock market ultimately recovered to its previous level a mere four months later.
When stock markets fall, where does all the money that was lost go?
FAQ
Should I sell my stock before the market crashes?
Selling when the market is down means you might lock in a permanent loss and miss the recovery. The key is to stay in the market for the long haul, not to try and time it. TIP: Be patient, tune out the daily ups and downs of the market and stay focused on your long-term goals.
Will stocks recover after a crash?
Stock Markets Always Recover
If you stay invested and keep faith in the long-term potential of the market, you’re likely to be rewarded. Those who sold out in panic during past crashes often missed the market’s best days, losing out on the eventual recovery.
What to do with your stocks when the market crashes?
Stay invested
If you need to access your money, of course, you may need to sell your investment, but most experts suggest that you hold onto your stock to ride out the lows until the market recovers at least somewhat.
What is the 7% rule in stocks?
The “7% rule” for stocks is a risk management strategy that dictates selling a stock when it drops 7% below the purchase price to limit losses and preserve capital. This rule, popularized by investors like William O’Neil, is based on the observation that even strong stocks typically don’t fall more than 7-8% below their ideal buy point. It can be implemented by setting a stop-loss order with your broker or through manual monitoring. Another related, but distinct, “7% rule” is a retirement planning concept where you assume a 7% annual withdrawal rate from your investments to determine how much you need to save for retirement, as explained in this YouTube video.