What to Do When the Market Crashes

For those of you who are wondering when or if markets will crash in the future, fear not – they will crash again sometime. But as to when it’ll happen, your guess is as good as mine and no one really knows for sure.

But, like I just mentioned, what we do know, is that stock markets around the world will crash again in the future. Stock market volatility is just part and parcel of the game and it really is as natural as how night follows day.

My American colleague Morgan Housel once did a study on the frequency of crashes for the S&P 500 (a widely-followed American stock market index) going back to 1928, and found that a 10% drop from a recent high occurs as frequently as once every 11 months.

Assuming that he has a $1,000 cash cushion in his investment account, Morgan came up with a rough guide for what he would do with that cash based on the severity and frequency of market crashes. Here it is:

Market falls by this much

Invest this much
(% of $1000)

Historical frequency


$100 (10%)

Every 11 months


$220 (22%)

Every 24 months


$300 (30%)

Every four years


$130 (13%)

Every decade


$125 (12.5%)

Every few decades


$125 (12.5%)

2-3 times per century

The basic idea behind Morgan’s thinking is that he wants to take the greatest advantage from crashes that are both severe, as well as historically frequent.

While Singapore’s stock market index, the STI is certainly very different from that of the S&P 500, there are still great commonalities that exist between people from all around the world in two of the most powerful emotions that governs financial markets – greed and fear.

And it is the commonalities between people that make historical lessons from the American stock market so instructive for even Singaporean investors.

So for me, the table above is a great way for even an investor in Singapore to frame his thinking on what he could do when the market crashes. But, there’s also something else that’s important that Morgan’s work is telling us.

While it’s tempting to want another crash like what we experienced in the Great Financial Crisis of 2007-2009, where the Straits Times Index (SGX: ^STI) fell by more than 60% from peak (~3,900 points) to trough (~1,500 points), investors also have to realise that a fall of that magnitude can be rare, statistically speaking.

To be certain, I’m not discounting the Asian Financial Crisis that started in 1997. It brought the STI to its knees with a 60-plus percentage drop from the index’s pre-crisis peak in Feb 1996 and the crisis started ‘only’ 10 years prior to the onset of the Great Financial Crisis in 2007. But, we have to bear in mind that two data points don’t make a trend.

It’s the long-run odds we have to consider and on that front, it seems more worthwhile to look back at long-stretches of history and that’s something Morgan’s study provided.

So, it’s important for investors to note that it might not always be the best option to be waiting around for epic crashes as plenty of money can be left on the table while waiting for the big one that comes around very rarely.

Now, it’s not hard to imagine someone questioning why he should even be investing in stocks if prices can crash so frequently. But just consider this: despite all the calamities (both natural and man-made) that America has endured, the S&P 500 has gone up more than 10,000% since 1928.

The Straits Times Index, though a slouch in relative-comparison, hasn’t fared poorly either on an absolute basis. Since the start of 1988, it has gained 275% to its current level of around 3,100 points, the 1997 Asian Financial Crisis, 2003 SARS outbreak, and 2007 Great Financial Crisis notwithstanding.

All told, we should never panic when the market crashes. Instead, we could look upon them as opportunities and deploy our investable-cash opportunistically, using Morgan’s rough-guide if you so wish.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.