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What To Do During a Stock Market Crash

February 17, 2025

4 min Read

Written by Karen Doyle

Edited by Emily Gadd

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Whenever the stock market reaches new highs, the doomsayers start coming out of the woodwork. “A crash is coming,” they lament. “The market’s going to crash!” But what exactly is a stock market crash? And more importantly, how can you protect your investments in the event of one? Here’s what you need to know.

See: 5 Things You Must Do When Your Savings Reach $50,000

What Is A Stock Market Crash?

A “stock market crash” is a sharp decline in one or more of the major market indexes in the U.S., which are the Dow Jones Industrial Average, the S&P 500 and Nasdaq. There’s no specific percentage drop associated with a crash, unlike a correction, which is a drop of 10% or more from the index’s 52-week high. In the past 45 years, there have been 24 market corrections.

What Are Some of the Causes of Stock Market Crashes?

A market crash can be caused by a number of factors. Past experiences include 1929 when the market collapsed and investors couldn’t meet margin calls. Another example was the tech crash in 2000 when the price of tech companies rose very quickly, then subsequently plummeted.

The Great Crash of 1929

Stocks had been actively traded on margin, or borrowed money. When the market collapsed, investors couldn't pay their margin calls. During this crash, the market fell 12.8% in a single day.

The Stock Market Crash of 1987

The crash of 1987 was caused by a rash of mergers and acquisitions, particularly in the nascent technology sector. This crash saw the market drop 23%.

The Tech Wreck of 2000

Sometimes referred to as the dot-com bubble, this was more of a long, slow drop than a crash. A spate of initial public offerings drove prices up wildly. Then, the prices dropped suddenly. Many companies that went public in IPOs during this time went bankrupt shortly afterward.

The Great Recession of 2008

This was caused by the decline of mortgage-backed securities, a popular investment of Wall Street banks. Banks were writing mortgages with no or low down payments, and homeowners began to have trouble keeping up with their payments. As they defaulted, the securities that were invested in these mortgages fell, and the market crashed.

COVID-19 and the Crash of 2020

The Dow Jones Industrial Average dropped 37% between Feb. 12 and March 23 as businesses closed and unemployment soared. The government quickly stepped in to help, however, and by the end of 2020, the DJIA was actually up 6.6% for the year.

What Happens When the Stock Market Crashes?

The value of investments like stocks go down. This can impact people who are living off investments, like retirees.
It can trigger a recession or depression. A recession happens when there is a decrease in economic activity for several months. This can lead to businesses closing and laying people off.

How to Prepare for a Stock Market Crash

Just like you wear a seat belt to protect yourself in a car crash, there are steps you can take to protect your investments in the case of a market crash. Here’s a three-step plan:

Make sure your investments are diversified. Some crashes are led by a single sector, like the tech wreck of 2000. Investors who had all their money in shiny new technology stocks took a far bigger hit than those who had at least some money in more traditional companies. Your portfolio should reflect different sectors, industries, geographies and company sizes.
Rebalance your portfolio regularly. When a certain sector is on fire, it’s tempting to ride the wave. But if you don’t rebalance regularly, you could find yourself with an outsized allocation in a vulnerable sector. Review your investments at least quarterly to make sure you’re diversified the way you want to be.
Maintain an emergency fund. Use a high-yield savings or money market account to store cash for unexpected expenses, like a job loss. That way, if the market crashes, the account won’t lose value.
Use a stop-loss order. You can set a price for when you want to automatically sell a stock. This can help you offload investments before you lose too much money.
Stick to your long-term goals. Historically, the market has always recovered and gone up after a crash. Fight the urge to panic and sell off all of your investments in the event of a crash.

What Happens After a Stock Market Crash?

After a crash, the government can intervene to help recovery. There’s a couple of things they can do:

Lower interest rates. The Federal Reserve often lowers interest rates to make it cheaper to borrow money. This can encourage businesses and people to buy more.
Subsidies. The government can direct revenue to an industry to help it rebuild.
Bailouts. The government has saved companies that would have otherwise had to close.

It can be really frightening when the stock market crashes, but it’s important to keep in mind that after every crash so far, the market has always eventually gone up.

Here’s a real-life scenario from the 2020 crash. On March 16, 2020, the DJIA closed at 20,188, having fallen from 29,551.42 on Feb. 12, 2020. On July 26, 2021, the Dow closed at 35,144.31

John Csiszar contributed to the reporting for this article.

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