Worried about another stock market crash? Read this post to understand stock market crashes and my preparation for the next one.
I’ll show you why people want to know the next stock market crash prediction, and why you don’t have to be scared.
Finally, I’ll reveal my prediction on when the next stock market crash will occur and why (by the way: I predicted 2020, and I was right).
- Stock Market Crash: Overview
- Stock Market Crash of 1929
- Stock Market Crash of 1987
- Stock Market Crash of 2000 (DotCom)
- Stock Market Crash of 2008
- Stock Market Crash of 2020 (COVID)
- Is the Stock Market Overvalued?
- Should We Sell?
- My Prediction: the Stock Market Will Crash Again, and That’s Ok.
- How to Beat the Stock Market Crash?
- Final Stock Market Crash Prediction
- What’s Next?
Stock Market Crash: Overview
The stock market has crashed every so often for a hundred years.
But our memories are short-lived.
No matter how many times the stock market crashes, the next one feels just as unexpected and just as painful.
How should you protect yourself from the next market crash? First, you must understand why crashes happen.
What is a Stock Market Crash?
A stock market crash is a social phenomenon. It is a human-created spiral triggered by economic events and crowd behavior psychology.
Stock market crashes happen when these 4 factors occur together:
- Stock market prices have been increasing for a long time.
- Everyone is overly optimistic about the future.
- The P/E ratio of the market today is higher than the historical averages.
- People borrow money to buy things at a high debt-to-equity ratio.
Disasters and government regulations also contribute to stock market crashes. But crashes mostly happen because people spend too much money they don’t have to buy things above their right values.
Let’s look at five significant stock market crashes in history and review why the market crashed in 1929, 1987, 2000, 2008, and 2020 and what lessons can we learn to help us avoid a future crash.
Stock Market Crash of 1929
The stock market crash of 1929 is the worst stock market crash in human history. It destroyed a generation of people and changed their relationships to their family, to each other, and to the government.
But for the six years leading up to 1929, it was euphoria.
The stock market has increased by 345% for six years straight, and people were borrowing money left and right to buy more stocks.
The good times felt like it’s never going to end.
But all good things end. On Black Tuesday of 1929, the stock market crashed for the first time by 10%. And it kept getting worse.
For the next three years, the market continued to crash.
At the worst point in 1932, the stock market lost 89% of its value from the peak.
It would take 23 more years, a whole generation, for the stock market to climb back up!
Imagine losing 89% of your money and waiting 23 years to get it back! Would you have the patience to hold for that long?
The Crash of a Lost Generation
1929 is a picture of unimaginable loss, so bad that we call that period in
For a decade, half of the people in the U.S. lost their jobs and the other half barely worked part-time.
People survived on beans and potatoes. Men fought over barrels of garbage as food scraps for their families.
The Great Depression brought proud men and women to their knees and led millions of children to grow up feeling constantly hungry, insecure and anxious. Many never got over the trauma for the rest of their lives.
Here’s a video that talked about the Great Depression’s economic hardship and its impact on people.
The first few minutes give you a real sense of how recessions can impact lives in emotional and psychological ways.
Can the 1929 Crash Happen Today?
Much of our anxiety about the stock market crash comes from our fear of what happened to our grandparents.
Can the Great Depression happen to us?
Another stock market crash will happen, but another Great Depression will likely never happen again. Here is why:
Bad Government Decisions Leading to a Depression
While the 1929 stock market crash destroyed the stock market, the Depression is made worse by other factors unrelated to stocks.
When the stock market crashed, people panicked and withdrew their bank money, which caused the banks to go bankrupt because there was no Federal Deposit Insurance.
As such, people not only lost their stock investments, they also lost their savings.
And then things got worse:
At the time, the United States was on the gold standard and promised to honor each dollar with a value in gold. So everybody put the little money they have left in gold.
This made the gold price soar, and the Fed feared that it would soon run out of gold. So the Fed decided to increase interest rates in the hope of improving the dollar’s value against the Gold.
Super high-interest rates stopped all businesses from accessing loans, creating massive layoffs, widespread bankruptcies, and a complete collapse of the U.S. economy.
The stock market crash of 1929 alone is bad, but not deathly. The bank runs and interest rate spikes created the Great Depression.
Government’s Effort to Learn from Its Mistakes
And today, we’ve certainly learned our lesson!
We have laws today that ensure we won’t make the same mistakes again. Nearly every bank in the United States is now protected by the FDIC so banks won’t run out of money. And the dollar is no longer pegged to the gold.
The Fed also knows to never spike interest rates when the economy is on the rough. Quite the contrary, the Fed now actively lowers interest rates during recessions in order to promote business lending and growth!
Stock Market Crash of 1987
On Monday, October 19, 1987, now known as Black Monday, the Dow Jone Industrial Average fell 23% in one day.
This crash happened on an ordinary day without any significant news.
At the time, this was the largest single-day percentage decline.
When the crash first happened, prominent economists predicted we are on the cusp of another Great Depression. And people panicked.
But the smart guys were utterly wrong. The economy grew steadily after the crash, and barely a year later by early 1989, the market recovered.
People who held onto their money recovered in no time. Those who kept investing saw
And the panicked ones who sold after the crash lost big.
The Crash That Isn’t
We now realize that the 1987 crash was not due to over-valuation but to a glitch in computerized trading.
Somebody somewhere made a mistake on a stock price, and this triggered all the computers to automatically “dump” stocks. We caught the error eventually, but the damage is done.
We’ve since added protections against such events from happening again.
Regulators now have “trading curbs” or “circuit breakers” to halt the stock market during substantial price declines.
The market crash of 1987 is very different from that of 1929. It did not destroy a generation. On the contrary, 1987 is an unprecedented opportunity for people to get rich quickly.
Stock Market Crash of 2000 (DotCom)
Now let’s talk about the last tech boom.
The stock market crash of 2000 is all about irrational exuberance. It is a stock market crash entirely created by the mania of this new technology called the internet.
This is why we call it the Dot.com bubble. And there is a lot of similarities between the Dot.com bubble and what we have now.
The stock market crash of 2000 is so important that it deserves its own special guide. And so I wrote a separate post dedicated to the DotCom crash.
But don’t read that yet! You should continue reading this guide, and then read the DotCom crash (again, link here.)
And not long after the DotCom crash, only eight years later, another crash happened.
We are talking about the 2008 Mortgage Crisis: the crash that traumatized the millennials generation.
Stock Market Crash of 2008
Less than 18 months after the stock market hit its all-time high in 2007, it dropped by 50%.
Thus begin the recession of 2008.
In the years leading up to 2007, the real estate market in the United States experienced unprecedented growth.
Housing prices across the U.S. doubled in a few years.
People borrowed money to buy houses so they can “flip and sell” in a few months.
If this sounds familiar, well, it’s happened before. But this time, it’s not the stocks; we have a real estate bubble.
Eventually, home prices became so high that buyers stopped buying. And so the home prices fell, and fell, and fell…
People got stuck with a costly mortgage they can’t afford and a house worth half as much, forcing them to declare bankruptcies.
But then things got worse.
Real estate bankruptcies did NOT just end in the real estate market…
Credit Swaps Turning Real Estate Market Crash into Stock Market Crash
When enough people defaulted on their mortgage loans, the banks who
And that’s where unexpected things started happening.
These banks not only sold mortgage loans to each other but also sold them to insurance companies, teacher’s pension funds, car companies, and other investors in the form of complex derivatives and credit default swaps.
So all of a sudden, it wasn’t just the banks who had bad mortgage loans, it was every Fortune 500 company and people’s 401Ks.
Credit swaps and mortgage derivatives were financial instruments designed to spread the risk around. But it ended up giving risk to everyone and hurting everyone.
And when famous investment banks Bear Stearns and Lehman Brothers collapsed one after another, everybody followed.
The U.S. Treasury Department poured billions of dollars to save our companies, from banks like Fannie Mae, Freddie Mac, to insurance giant AIG and auto companies General Motors and Chrysler.
Hundreds of thousands of people lost their jobs. Banks stopped lending and investments froze.
Even though interest rates were at 0%, nobody was borrowing and growth simply stopped.
2008 Recession Recovery
The stock market struggled for another five years before hitting its strides again in 2012.
For those that kept their money in the stock market, they would’ve recovered all of their losses in five years. That’s not that short of a time period, but not as bad as the 23 years during the Great Depression.
Steady Recovery from 2008
By 2012, the United States stock market is on the upswing. Between 2010 to 2017, the stock market price increased by 215%, which is an average of 12% growth rate every year for over eight years.
Toward the end of 2017, the United States government passed a sweeping tax cut that among many changes, cut the corporate profit tax from 35% to 21%.
The new law sent the stock to an all-time high, again.
Many smart people thought the 2008 recovery maxed out by 2016.
Little did they know that 2016 is only the start of another bull run!
But if there is a lesson we can learn from the past, it is that when something feels euphoric, it’s probably time to get nervous again.
Looking at historical data, we see that a recession tends to happen every seven to ten years.
If we assume that the 2008 recession ended in 2010, then another recession is bound to happen as we approach 2020, right?
Stock Market Crash of 2020 (COVID)
I predicted that the stock market would crash in 2020, and it did.
But I had assumed that the market was going to crash in 2020 due to the tech bubble.
Little did I know that a virus would sweep the world and forever change our lives.
An Abrupt, Self-Induced Recession
When Wuhan went into lockdown in late January, the rest of the world was watching China carefully.
Some criticized China for being so merciless toward its own citizens. Others were impressed by its swiftness.
But most watched as if it would never happen to them.
But then things hit all of us at once.
Italy started to go on alert. And then it was the rest of Europe. And then around mid March, the United States went into lockdown.
I remember going home from work on my last day feeling apprehensive. We tried desperately to buy masks online but couldn’t find any.
I remember going into the grocery store and buying lots of rice and alcohol wipes.
My neighborhood was dead silent during those first few weeks of the pandemic.
No cars, no people on the streets, only the sound of birds chirping across bright, spring skies.
The world stopped completely. Well, except the heroes. The doctors, nurses, grocery, restaurant, and delivery workers are on the frontlines, sacrificing their lives to save others so the rest of us could stay home.
Fastest Recession, Fastest Recovery
As the world stopped, the market reacted very badly.
Because we had no idea what is going to happen.
Will this virus wipe all of us out? Will this last days, months, or years?
The stocks that suffered the most were stocks in travel, but really, the entire stock market went into a full decline.
In two weeks, the Fortune 500 stocks alone went down by 31%.
And yet, something remarkable also happened.
We started to buy things online at an unprecedented rate. Some of us found that we are able to work fully remote.
We got married over zoom, canceled birthday parties and grieved.
And soon enough, we had vaccines.
First, Moderna, then Pfizer, and then more vaccines around the world.
We realized that the world is never going to be the same again, but this new world is going to keep moving forward.
The stock market reacted, partially due to unprecedentedly low interest rates, by having one of the fastest recoveries in the history of all recessions.
The economy first went off a cliff. But then, it was resurrected from death to boom in the span, literally, of less than two weeks.”
As Warren Buffett put it:
And this is why you can’t predict recessions and recovery.
Even if you had been smart enough to sell your stocks when COVID hit, you may not be quick enough to buy back in time to reap the benefits.
So what’s going to happen now?
Is the Stock Market Overvalued?
The stock market tends to swing from overvalued to undervalued as the market goes from euphoria to recession.
In 2020, we went from recession to euphoria so quick, we are still processing what happened.
In 2021, we can measure the likelihood of a recession by looking at how overvalued the stock market is using the PE (price-to-earnings) ratio.
The most accurate form of PE ratio is the Shiller PE ratio, also known as the CAPE (cyclically adjusted price-earnings) ratio. The ratio is popularized by the Nobel Prize-winning economist Robert Shiller of Yale University.
Using Schiller PE to Estimate the Next Crash
Below, you will see the Shiller PE ratio from 1881 until 2021 in solid blue, and a lighter blue to represent my forecast line.
Think about these two lines like this:
- When the solid blue (actual Shiller PE ratio) is above the light blue (forecast): the stock market is overvalued.
- When the solid blue (actual Shiller PE ratio) is below the light blue (forecast): the stock market is undervalued.
Scroll to the left to see more data:
You can scroll across the screen to see more data.
The Shiller PE ratio tells the story perfectly in the past 20 years.
Well, you can see from the chart that the stock was overvalued leading up to the 2000 stock market crash.
When the 2008 recession hit, the stock became undervalued as the solid blue falls below the lighter blue.
But since about 2014, the stock has become overvalued again.
The 2020 pandemic briefly lowered the solid blue line, but it’s since recovered in a hot second.
So is another correction coming soon?
Should We Sell?
Based on what you’ve read, it seems because the stock market is overvalued today, we should sell because a crash will come eventually.
If that’s what you think, then you’re wrong.
Your logic is sound because we will always have another stock market crash.
But I am going to show why you should never sell your stocks in anticipation of a crash.
Below, I’ll give you four reasons why you should never try to act smart by “buying low and selling high” no matter how confident you are:
- Stock prices are statistically proven to be RANDOM.
- It’s IMPOSSIBLE to time the market (might as well call it gambling).
- Being optimistic OR pessimistic about the market hurt us equally. Solution? Don’t feel. Inaction is the best action.
- Over the next decades, stocks will always go up more than they go down.
Reason#1: Stock Prices Are Random
There is plenty of empirical (i.e., well-researched, data-backed) evidence telling us that the prices of stocks follow a random walk. This means the movement of stock prices from day to day DO NOT reflect any pattern.
Surprised? You should be. Our eyes think we see a series of ups and downs, and we think we see some patterns.
But even if you flip a coin every day for many days, you’ll also see patterns of ups and downs, even when knowing that coin flipping is random.
The stock market’s path every day is just like a series of random coin tosses. Past prices cannot and never have been able to predict future prices.
The chart below shows the outcome of 10,000 random coin tosses, a pure random walk.
If you saw a pattern, you’re biased to see patterns just like everyone else!
Reason #2: It’s Impossible to Time the Market
During the Dot-Com bubble of 2000, the stock market became technically overvalued starting in 1996, but the stock market did not crash until four years later after it went up by another 50%!
Had you pulled out your money in 1996, you would’ve lost big!
Trying to time the market by “selling high and buying low” is equivalent to rolling the chips in Las Vegas.
You could be years too early or days too late.
Be very aware of investment strategies that exploit anomalies, trying to predict future prices based on past prices.
Remember what we learned above: there are NO trends; everything is random, so past prices never predict future prices.
Any wins you might have banked from day trading is just pure luck.
Whenever someone on TV says they can predict the future, realize just because you see a pattern from lines on a chart doesn’t mean it isn’t all randomness.
The smartest people get it wrong all the time. What makes you a better guesser other than your urge to roll the dice?
Reason #3: Both Optimism and Pessimism Hurt Us
Here is what we know: the stock market goes up and down. That’s it.
But nobody knows when the next downturn will begin or when the future growth will kick-off.
There is no point in timing the market because the prices of stocks follow a random walk.
If you are overly optimistic about the stock market, you can get burned. If you are too cautious, you can miss a golden opportunity.
How can we remain neither overly optimistic or cautious? How can we capture the stock market growth while protecting ourselves from a crash?
We simply do nothing.
Research shows that those who forgot they had money in the stock market did better than those who cared about it and checked prices daily.
Why? Because inaction is the best action. Just set it and forget it and you will win.
Reason #4: The Stock Market Always Go Up Over a Long Period of Time
Over the entire history of the stock market, we know that stock prices are growing more than they are declining.
The chart below shows the annual stock market change. The green bar represents a growth year and the red a decline.
In the past 9 decades, growth years account for 75% of total years while decline years account for only 25%.
Translation: if you keep your money in the stock market for the long
Over the course of your life, you’ll experience a couple of heart-stopping, jaw-dropping declines, and many small drops. But if you stick with it, the stock market will on average go up, way up.
So put your money in a broad index fund and let it sit and grow on its own. If you’re interested, here are the Vanguard funds I recommend.
My Prediction: the Stock Market Will Crash Again, and That’s Ok.
Nobody knows for sure when it’ll happen, but we know it will happen eventually.
Remember 1987 when most of the brilliant people fail to predict recessions?
It turns out that most economists failed to predict recessions every single time.
Don’t listen to “experts”. Don’t listen to me.
How do you REALLY beat an impending stock market crash? Well, read on!
How to Beat the Stock Market Crash?
We know that market crash always comes and that it’s not something you can predict to avoid. So what can you do?
All you can do is to strive to be neither overly optimistic or cautious and thus, to invest for the long-term.
More specifically, it means that you should:
- Find your optimal allocation of assets
- Make sure you have a nice stash of money in cash and assets not correlated with the stock market
- Go live your life without watching the stock market on a daily basis!
1. Optimize Your Allocation
Invest more in stocks when you are young and less in stocks as you get older. And as you get older, slowly decrease the risk of your portfolio.
Not sure about your allocation? Follow Vanguard’s advice:
- Allocate 90% of your investment in the stock market until you are 40
- Allocate some of your stocks to international.
- By the time you retire, you should have 50% of your investment in stocks, then 30% by the time you reach your mid-70s.
To learn more about how to select across thousands of Vanguard funds, read this guide that talks about the best Vanguard funds for every stage of your life.
If you are nearing retirement, check out my guide on Vanguard Wellington, it is my all-time favorite fund for retirees.
2. Invest in Cash and Uncorrelated Assets
As you get older and mainly when you are closer to retirement, the money you invest outside of the stock market becomes more important.
You want to make sure when the stock market crashes; your non-stock assets do not crash, too.
For decades, the default option to buy uncorrelated assets is to buy bonds. However, in recent years, stock and bonds have risen and fallen in tandem due to near-zero interest rates.
We see the Fed beginning to increase interest rates, but only time will time whether this is too late.
The general advice today is to still invest in bonds, but also put more of your money in short-term debts and cash.
And nowadays, it might be smart to invest 5% of your portfolio into crypto: either Bitcoin or Ether. Read my Bitcoin intro guide here.
3. Let the Stocks Stay in the Stock Market
You’ll be fine in the long run if you allocate your money across stocks, bonds, and cash. And maybe a bit of crypto.
Have enough cash to spend for 2+ years, and just let the stocks sit there.
Even though a stock market crash might be coming in 2021 and beyond, never try to time the market because that would just be gambling.
If you are young, live your life and invest in the long run.
If you are near retirement, make sure you have less than 50% of your assets in stocks and then you should be fine, too.
Get out of your daily stock market monitoring and go live your life.
Final Stock Market Crash Prediction
So this is my final prediction of the stock market crash:
- We’ll have another banner year in 2019 (Update: CONFIRMED)
- The market will crash in 2020. (Update: CONFIRMED)
- Will it crash again? Yes, definitely. Maybe 2022.
But that’s not going to make me do anything differently this year, next year, or the year after.
I’m going to keep investing as much money as I can in the stock market knowing that I can’t predict the market and the smartest people can’t predict the market because it follows a random walk.
And if I invest in the long run, I will win because the
Still feeling scared? I’ve written a brand new post about the psychological hacks that can help you win during a recession. Make sure you read it.
What do you think? Are you as comfortable as I am to do nothing? Do you think you can predict a market crash? Comment below and let us know!
Ever wonder, “Am I rich?” Read my latest analysis on the Average Net Worth by Age: What Is Considered Rich?
Vanguard is great, but out of its 3,000+ mutual funds, which one is for you? Check out Best Vanguard Funds for Every Stage of Your Life
Learn the secrets that make the Vanguard Wellington Fund the miracle to retiring wealthy. And whether you should this Vanguard Classic.