A stock market decline is more gradual, although crashes can occur in a decline and can even cause a more prolonged decline. A stock market decline that lasts for years is known as a bear market. That's an extended stock market decline that typically last 18 months. A bear market is usually accompanied by an economic recession. How does a crash cause a bear market? It's usually after an extended bull market, which is an upswing in stock prices. Greed drives stock prices above the underlying worth of the company, as measured by earnings. In some cases, like the tech bubble of the late 1990s, companies had no earnings at all. Stock prices were driven up by the promise of future earnings. When investors are driven by emotion, not financials, then that emotion can reverse quickly, turning into panicked selling. That's the symptom of a stock market crash.
Stock prices that aren't supported by earnings or underlying economic reality is how you can tell when the stock market is about to crash. There's a feeling of "I've got to get in now or I'll miss the profits," which leads to panicked buying. Usually, the individual investor will buy right at the market peak. The stock market crash is the reverse, panicked selling. That's when the individual investor, if driven by fear, usually sells. Buying high and selling low is a sure-fire way to lose money in the stock market.That's why its extremely difficult to time the market. By the time you get the information to make a move, institutional investors and speculators have moved on.
What's the solution? Keep a well-diversified portfolio of stocks, bonds and commodities. Rebalance it as market conditions change. During a stock market crash, stocks will make up less of your portfolio, while bonds and commodities will make up more. Sell some of the bonds and commodities to buy more stocks, now that the prices are down. When they go up again -- and they always do -- you will profit from the upswing in stock prices. You've sold some of your bonds and commodities, so you won't lose as much when those prices fall during the bull market.
Famous Stock Market Crashes
The most famous stock market crash was The Crash of 1929, also known as Black Thursday. It kicked off the Great Depression. On October 24, 1929, 12.9 million shares of stock were sold in one day, triple the normal amount. Share prices fell 15-20%, a great example of a stock market crash. Another famous one was the Crash of 2008, which led to the global economic crisis and recession of 2008-2009.A stock market crash that didn't lead to a recession was the Crash of 1987. The Crash of 2010 also didn't lead to a downturn.
