Nobody can predict when the stock market will crash
The stock market has crashed before and will crash again, but no economist, analyst, or forecasting model can tell you when the next one will happen or how severe it will be. People who claim they can predict crashes are either selling something or wrong. What you can do instead is understand what causes crashes, what happens during them, and how your own situation changes if one occurs.
A crash is typically defined as a sudden drop of 20 percent or more from recent highs. The market has experienced crashes in 1987, 2000, 2008, and 2020, among others. Each one looked different: the 1987 crash happened in a single day; the 2000 crash unfolded over two years; the 2008 crash was tied to a financial system failure; the 2020 crash lasted weeks before recovering. The causes ranged from computer trading errors to real estate collapse to pandemic lockdowns.
Key Takeaways
- Market crashes are normal parts of how stock markets work, but timing them is impossible — even professional investors cannot predict them.
- Your actual risk from a crash depends on when you need the money, not on whether a crash happens.
- If you are saving for something more than five years away, historical data shows you have usually recovered by then even after major crashes.
- If you need money within the next year or two, holding stocks exposes you to the risk of selling at a loss when you need the cash.
What actually causes stock market crashes
Crashes happen when large numbers of investors sell at the same time, usually because they believe prices will fall further. The trigger can be a real economic problem — a bank failure, a recession, a pandemic — or it can be a sudden shift in what investors think the future will look like. Sometimes the trigger is small and the crash is large, because fear spreads faster than reason.
In 1987, the market fell 22 percent in a single day with no major economic news that day. Investors were already nervous, and computer trading programs amplified the selling. In 2008, the crash was tied to real mortgage defaults and bank failures, so it lasted longer and cut deeper. In 2020, the crash came from lockdown uncertainty, but it reversed within weeks once investors saw the economy would not collapse permanently.
The pattern is that crashes are easier to explain after they happen than before. Looking back, people say "of course the housing market was unsustainable" or "obviously pandemic fears were overblown." Looking forward, the next crash will have a reason that seems obvious only in hindsight.
How your time horizon changes your crash risk
The real question is not whether a crash will happen, but whether you will be forced to sell during one. If you need money in the next one or two years, a crash is genuinely risky because you might have to sell at the worst time. If you are saving for retirement 30 years away, historical crashes have always recovered by then — sometimes in months, sometimes in years, but always before you needed the money.
Someone who invested $10,000 in a broad stock market index fund in 2007, right before the 2008 crash, would have watched it fall to about $6,500 by early 2009. But by 2013, it was worth more than $20,000. By 2024, it would have been worth roughly $60,000. The crash was real and painful, but it mattered only if that person needed the money between 2008 and 2012.
This is why financial advisors talk about "time horizon" — the length of time before you need the money. If your time horizon is long, you can ride out crashes. If your time horizon is short, you should not be holding stocks at all, crash or no crash.
What happens to different types of investments during a crash
Stocks fall the most during crashes, sometimes 30 to 50 percent. Bonds typically fall much less — sometimes they actually rise because investors move money into safer assets. Cash does not fall at all. A mix of stocks, bonds, and cash will fall less than stocks alone, but it will still fall.
During the 2008 crash, a portfolio that was 60 percent stocks and 40 percent bonds fell about 20 percent, while a pure stock portfolio fell about 37 percent. During the 2020 crash, the mixed portfolio fell about 12 percent while stocks fell about 34 percent. The trade-off is that in normal years, the stock-heavy portfolio grows faster.
International stocks and emerging market stocks often fall more than U.S. stocks during crashes. Small-company stocks usually fall more than large-company stocks. Bonds from companies in financial trouble fall more than government bonds. The safest assets during crashes are U.S. Treasury bonds and cash, but they also grow the slowest in normal years.
How to prepare without trying to time the market
You cannot know when a crash is coming, so do not try to move all your money to cash waiting for one. People who do this often miss the recovery and end up worse off. Instead, build a portfolio that matches your time horizon and your comfort with losses.
If you need money within two years, hold mostly bonds and cash. If you need money in five to ten years, a mix of stocks and bonds makes sense. If you need money in 20 or 30 years, you can hold mostly stocks because you have time to recover. This is not a prediction about crashes — it is a plan for how you will feel if one happens.
You can also build in a "cash cushion" — money set aside for expenses in the next one or two years that you never invest in stocks. This way, if a crash happens, you do not have to sell stocks at a loss to pay your bills. The rest of your money can stay invested and recover.
What the historical record shows about recovery
Every stock market crash in U.S. history has eventually recovered to new highs. The 1987 crash recovered in about 18 months. The 2000 crash took about seven years. The 2008 crash took about four years. The 2020 crash took about five months. None of these recoveries are may provide to happen the same way in the future, but the pattern is consistent across different eras, different causes, and different severity levels.
The longest recovery in modern history was after the 2000 crash, when the market did not return to its previous high until 2013. Someone who invested a lump sum at the peak in 2000 and never added another dollar still came out ahead by 2013 if they held on. Someone who panicked and sold in 2002 or 2003 locked in losses and missed the recovery.
This does not mean crashes are painless or that recovery is may provide. It means that if you can afford to wait, crashes have historically been temporary. The people who suffered most were those who needed the money during the crash or who sold in panic.
Frequently Asked Questions
Should I move my money to cash right now because a crash might happen?
No. If you move to cash waiting for a crash that does not happen for five years, you will have missed years of growth. If the crash happens next month, you will have avoided losses but you will have also given up gains. You cannot know which scenario will occur, so the better approach is to hold a mix that matches when you actually need the money.
Do certain stocks crash less than others?
Large, established companies typically fall less than small companies during crashes. Utility stocks and consumer staple stocks often fall less than technology stocks. But "fall less" still means they fall — there is no stock that avoids crashes entirely. And the stocks that fall the least during crashes often grow the slowest in normal years.
If I think a crash is coming, can I sell now and buy back in later?
You can try, but the data shows most people who attempt this end up worse off. They sell at what feels like the top, then either miss the recovery or buy back in after prices have already risen. Even professional investors rarely time this correctly. A better approach is to hold a portfolio you can stick with through ups and downs.
What should I do if a crash happens while I'm invested?
If you do not need the money for several years, do nothing. Selling during a crash locks in losses. If you need some money soon, take only what you need and leave the rest invested. If you have a cash cushion set aside, use that instead of selling stocks at a loss.
Are crashes getting more common or more severe?
The data does not show a clear trend toward more frequent or more severe crashes. The 1987 crash was sudden but brief. The 2000 crash was long but less severe than 2008. The 2008 crash was the worst in decades but the 2020 crash was much milder. Crashes seem to be a permanent feature of markets rather than something that is getting worse.