The 5 Worst Market Crashes of All Time (And What We Learned)

0:00Brian Preston:This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. Fall is the perfect time to refresh and reorganize your space. At the Home Depot, find power tools and tool sets starting at$50 to help tackle DIY projects, home updates, and more.

0:42Brian Preston:Whether you're drilling brackets to support new shelving or sharpening your hedge trimmer blade with an angle grinder, the Home Depot has the tools you need to check projects off your list. Shop Labor Day savings at the Home Depot and gear up for fall projects with the right tools to keep your projects moving. markets crash. That's not new. What you do next, that's everything. Brian, I am so excited about this because there's a song and dance that the media does time and time again when the markets crash, telling you that the market will never recover and that you should sell everything. And we want to cut through that noise today because we believe there's a better way to do money.

1:23Today, we're going to look at the five worst market crashes in U.S. history, the cause, the effect, and what you can learn from each so that your financial plan succeeds before, during, and even after volatility. Let's jump right in.

1:40Brian Preston:All right, Brian, let's talk about the very first one. Now, this is the one that I think everyone has heard about. This is the Great Wall Street Crash of 1929. This is the one that actually led to the Great Depression. I think even if you're not as familiar with the Wall Street Crash, you're very familiar with the Great Depression, all the bread lines and everything else. So, Bo, let's give them the timeline and even kind of set the context of what was going on back then. Yeah, so this actual crash took place from 1929 to 1932. And as you can imagine, the headlines were pretty aggressive. Wall Street in panic as stocks crashed.

2:18Brian Preston:I mean, this was a terrifying time in our country, something that we had not seen up until this point. Well, this is also what broke the banking system. You think about all the runs on the banks. If you watch, it's a wonderful life. You see what was kind of a flash of what was going on. And there's a few key factors that we can kind of focus on. And, Bowie, I think since we're doing five of these, I want everybody to have the context of think about greed and then think about the exasperation that comes from them, the fear that this creates. The human dynamic is amazing, and you're going to see a trend.

2:54through all these. And here's the key factor on this one. Excessive speculation. There's some of that greed showing up. And margin trading. Did you even know that they had margin trading back then?

3:04Brian Preston:I did not even know that that was a thing in the 20s. What happened is people saw run-ups and they started pouring money into the stock market. They started selling their bonds, their fixed income, their conservative assets. And then they even started mortgaging their houses to get more money in. So this is literally, just like you said, Brian, this is like greed at an epitome. people wanting more, more, more, more, more, more, more. And then, I mean, I couldn't believe when I read the stat that in 1929, there were 300 million shares of stock that were on margins. Unbelievable. This is the wild part.

3:37And then the lack of regulation and market exuberance, that obviously led to a disconnect from what the companies were worth that were on these exchanges to what the value that they were trading at. It just got disconnected completely.

3:51Brian Preston:And then the federal government tried to curtail this. They tried to raise interest rates, but this was on top of a mild recession that had happened earlier that summer. So it was this perfect mix of events. And so when we think about this, we think about this as an investor, what did the actual numbers look like? What was the gravity of this? If you think back to this time period, it was actually an 89 % drop in the Dow Jones industrial average. I mean, that is devastating. That makes my stomach hurt just looking at it. And then if you think about this, this is why this sparked the Great Depression.

4:27Yep. This is what I mean, when you just see the stats of the GDP fell 30 percent, unemployment peaked at 25 percent. This is if you get I mean, think about that from a standpoint of your social group, your friends, your family. You know, people that have been devastated by the impact of this speculation and then the aftermath of all these people losing their jobs is really kind of a scary thing.

4:52Brian Preston:And then that led to little to no liquidity available in the market. You hear about the bank runs that caused over 9 ,000 banks to fail. And this was such a severe downturn. This was so, so gravitous that the market actually didn't get back to its pre-crash levels until 1954. 54. That's how severe and how big and how bad and how aggressive this downturn was. And so the question may be, okay, well, what do we take away from this? What do we learn? How can we think about that market crash and apply it to present day? And I think the takeaway is something that we can all constantly be reminded of.

5:34Brian Preston:Trees don't grow to heaven. Now, people are saying, what do you mean by that? I just want you to know, I am old enough that I've lived through so many crazes that people just lose their mind about. Historically, you hear people talk about tulips. I'll talk about beanie babies. You can think about anything where people are chasing the latest, greatest trends to their detriment. I mean, this is the human component back to the greed is that there's just never enough that people just to satiate the appetite that they more, more, more, and they take all these crazy risks. And then when the human element, the herd element where everybody panics and gets into fear together.

6:12You see, this is why, Bo, don't go chasing the hot dot. Make sure you're not sticking all of your financial success to one key thing being successful, and you'll be in a much better place.

6:24Brian Preston:Yeah, in 1929, people were margining up to 90%. That's like nine times your invested amount. That is so aggressive and so far out on the risk spectrum that even if there were a 10 % correction in the market, it would absolutely devastate you. It would completely wipe out your portfolio. Now, this is what we're not saying. We're not saying that the markets are scary and you need to avoid them and stay away from them altogether because market crashes are normal and they're a part of being an investor. But while they are normal and healthy, what causes them to be devastating is when your behavior becomes abnormal and unhealthy.

7:08Brian Preston:So you should be making the same decisions during a market crash as you do during the bull market. And in 1929, that was not what people were doing. It's the common sense of the things we share on the show all the time. Don't go out there and leverage up to go invest and do all kinds of other crazy, speculative, risky things. Know your why with your money and what you expect out of it. And you can actually use it as a really powerful engine to create the wealth and the life that you're dreaming for. All right, Brian, so we're talking about the five most significant downturns in stock market history.

7:40Brian Preston:The second one actually occurred in October of 1987, and this is known as Black Monday. Oh, wow. And this is one, I mean, when you see the headline, look at this headline here, is that stocks plunge 508 points, a drop of 22.6%, 604 million volume, nearly doubles the record. And here's the thing that shocked me, Bo, when I first read this, I was like, it talked about systems broke this. And we live in a world now where algorithms and other things, but the systems that you think about, you can put in limit orders, you can think about all the option systems. This really was one of those key factors where the programmatic trading and the portfolio insurance, which caused all kinds of other strange ripple effects cause this huge drop.

8:28Brian Preston:Yeah, so it's fairly complicated what actually happened, but basically there were complicated financial products that were involved, and these programmatic trading triggered it to where it just became this pylon effect that bad went from worse and worse went from worse to even worse, and it fell precipitously so much that it was the most significant drop, single-day drop in U.S. history. And this was amongst the fact that valuations were super high and there were some global geopolitical things going on that had the public naturally a little bit more anxious and uncertain. So when the fear crept in, everyone ran for the exits rapidly.

9:09So let's look at what this looks like visually. And here's the crazy thing. Now, we see the drop of 26%, but I just saw on that headline close between 22 and 23 % of this came in one single day and what's crazy is when i look at the graph when we were doing the show meeting i was like wait a minute that doesn't look as steep as i was thinking and it was brought this is a monday that's right so when you look at this chart realize you had a close on friday and because of the we use y charts it basically tried to levelize out between what happened saturday sunday but this is actually a one single day drop so it is so much steeper than even what the visual shows That is a gut check if I've ever seen it.

9:49Can you imagine you have a million-dollar portfolio and you come out the other side and within a weekend you've lost$250 ,000? You're devastated.

9:59Brian Preston:And so the aftermath of this was pretty significant also. Markets returned to their pre-cap crash levels by May of 1989. But it's interesting, even though this was such a significant bad day and this actual downturn right here around Black Monday was so severe, a recession actually did not follow this. Everybody thinks, oh, these giant bear markets, these giant crashes, it moves the economy into depression. That was actually not what took place in 1987. There was no recession there. So what's the takeaway? What's the thing that you ought to know or the thing you ought to recognize? one singular bad day or one singular bad event won't necessarily derail your wealth building journey, even though it does feel painful in the moment.

10:47I mean, even on that previous graph, it showed, and we're going to talk a little bit more about this V-shaped recoveries is a common thread you'll hear, but it is important for anybody who starts investing. There's a reason we tell you this is long-term money, money that you can let sit out there for five to seven years is because even in normal markets, we're doing the five biggest drops. But you think about the intra-year changes that we see, and I don't know if anybody's ever shared this with you, but if you look at it, we have a graph up on the screen, and for my podcast listeners, it is very common that every year, including the good years, you're going to see intra-year changes or drops of around 14%.

11:26People don't know that. They just assume that when we talk about an annual rate of return of 8%, 9%, it's going to come in those nice little prefabricated cubes. No, there's going to be a lot of gut-wrenching emotions that you better be prepared. It's a feature of this wealth-building process, but don't get caught up in the emotional side of this.

11:46Brian Preston:I think people don't recognize that when you hear years like 2003 where the market made almost 30%, they don't recognize that inside of that year the market was down 14%, Or in 2009, when the market makes almost 25%, inside of that year, the market was down 28%. Volatility and downturns and the market moving up and down is normal. That's why you want to make sure that you don't make rapid decisions when things get uncomfortable because the worst thing that you can do is try to get out of the bottom when it's going to turn very, very quickly. And I think these next couple severe bear markets show us that because this is one, Brian, you remember all too well, the 2000 to 2002 dot-com bubble bursting.

12:34This is what's amazing to me is that these last three that we go, I actually was managing money through all three of these. And the dot-com bubble, just to kind of set the stage for everybody, and once again, everybody's chasing the hot dot and the trend. If you look at what the headline was on this, the year dot-com turned into dot-bomb. And I did live through this, and this is where it didn't matter if you were doing pet food, if you were doing grocery stores, if you just put dot-com at the end, money was just being thrown out there after people. Because once again, the human factor is that we pile into things thinking that we're going to get into the latest, greatest trend.

13:09And it was devastating financially to a lot of folks.

13:12Brian Preston:And so what ended up causing this was exactly that, this massive speculation on unprofitable companies. So the opportunity looks so exciting, so amazing, so incredible that the fundamental numbers did not actually justify the valuations these companies were seeing. And what that ultimately led to was overvaluation, companies being listed for way more than they were worth, and herd behavior. You would go to the office Christmas party or to the family reunion, and all of a sudden you hear somebody telling you about, oh, this latest, greatest, amazing, high-flying stock they made all this money on.

13:46Brian Preston:And so naturally you decide, okay, I got to pile in, pile in, pile in, pile in, pile in. And this FOMO-driven investing, this idea that if I'm not in, then I'm going to miss out, led to the market being unbelievably frothy and even irrationally exuberant. Well, I think it's something, and we'll get to what the key takeaway is, but this is something just for you to internalize and think about, is that a lot of people, when we have disruptive new technology, technology you have to realize that this disruptive technology is going to take a lot and turn it into a few key players so to have those few key players that end up coming out top of the heap at the end you're going to see lots of destruction in the wake of that so let's actually look at the actual numbers yeah from this drop from the dot-com bubble bursting if you look at the s &p 500 it actually dropped 49 percent it cut in half over this time period yeah i mean and this is widespread wealth destruction we had you think about this the recession of 2001 kicked in you also this is the start of the last decade now here's i want to give you guys the context of somebody who was actually managing money through this is that i actually we if you were a professionally managed portfolio with diversification that was goals-based and your risk profile, you actually did really good.

15:07This was a great time to be a financial advisor because I remember how in this period, diversification actually got a lot of people through this and actually come out even better.

15:18Brian Preston:Yeah. If you are someone and you're going through this downturn and you're going through this type of scary market, the things that have always been sound, continue to be sound, and actually continue to be even more sound. Things like diversifying your portfolio, not having everything in one basket. Things like dollar cost averaging. Yes, the market from the peak to the trough dropped 49%. But if you were buying every month or every quarter or putting your money to work every year, you were actually capitalizing on that decline. And if you have a long-term horizon, if you can zoom out and say, okay, yes, the market is down right now.

15:56Brian Preston:My portfolio is down. I have some losses on paper, but my timeline is 10, 15, 20, 25, 30 years out into the future. If you can have that perspective, those tools, those keys can allow you to be a successful investor even when these market environments present themselves. So what's the big takeaway we have from the dot-com bubble bursting? This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business.

16:39Brian Preston:The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. Hype is not a business model. That's exactly right. That's like I said, a lot of destruction is going to be created. And I think a lot of people feel like they have to go scramble in and try to pick the next big winners. But it is worth remembering that 90 % of actually fund managers who are doing this, getting paid professionally to go pick the next latest and greatest thing, underperform just the index. And that's over a 15-year time frame.

17:13So guys, I'm telling you, innovation is going to create lots of opportunities for you to make money off of. But there's also going to be lots of destruction in its wake. So quit trying to pick the winners yourself and just buy the market itself. And I think you'll be rewarded in the long term in a much better way.

17:31Brian Preston:Oftentimes, it's a more prudent investing strategy to just be the market than to try to beat the market. And the dot-com bubble sort of underlined that to be true. All right, Brian, let's talk about the next great market crash that we've seen. This is the fourth one on our list. And this one is another one that you and I remember all too well. This is actually the Great Recession from 2007 to 2009. Yeah, this one I always like because I love the icon we used here because we have a house instead of an arrow going up and down. If you're noticing, this is how much intent and purpose we put in this stuff.

18:06And it's because we did have a complete collapse. And you guys, you now have the context. You know the after effect. But for everybody who didn't know, back then, everybody said, God's not creating more land. That's right. So houses can't go down in value. man oh man did we show that that is not the case that once again trees don't grow to heaven

18:24Brian Preston:is that look at what happened back in 2008 yeah we actually saw a number of key factors leading to this great recession one of them subprime mortgage mortgages banks were lending money to people that did not need to be borrowing money and they were borrowing it in droves we saw excessive leverage folks that didn't need to be borrowing money anyways were borrowing more and more and more. And then financial institutions are recognizing, hey, we can package up all this borrowing, all this leverage, all these bad deals. And if we package enough of them together, we can sell them as something that they are not.

19:01Brian Preston:And this beautiful storm of horrible decision making conglomerated together to create the largest downturn, the most significant drop that we've seen in the financial markets and the economy since the Great Depression. Well, I mean, So much, once again, just the hubris of the human condition is that we have this overconfidence. We take something that's good, and then we just, the greed of the situation is, I mean, I lived through this, and I remember I even used one of these loans, a stated income loan. Can you imagine if your underwriting process, where housing is such a hard thing, just asking somebody, hey, on your word, what do you think you have coming?

19:37Stated income. No go out there and looking at pay stubs or anything else. This thing that shows just the amount of speculation and greed that went into this. And once again, valuations got disconnected from where the value of actual assets were. And if you want to see what the drop is, look at this. We lost 49 % over this two-year period. And what this doesn't show, I mean, the graph shows it, but you can see a lot of this came in that fourth quarter of 2008 where the poop really hit the fan, where we realized this is where you saw Bear Stearns, Lehman Brothers, and all this other stuff where you realize all these people who were just heavy into these mortgage products got crushed.

20:22Brian Preston:Yeah, from October 1st of 2008 to November 21st, that 49 % loss that we saw of the Great Recession, 36 % of that happened in that small time frame. That's how severe that fourth quarter was. And so the aftermath was pretty severe as well. Not only did we see a severe global recession, not just here in the United States, but we saw it across the entire globe. We saw bank failures. We saw government bailouts. It was unprecedented times, again, the most severe economic downturn that we've seen since the Great Depression. And again, fueled by greed and bad financial decision making. We all remember the loss of jobs.

21:04Housing was just, you know, you saw neighborhoods that just, you know, had essentially PVC pipes on the land for a decade. Because it's just this devastated. I even have seen people talk about the aftermath of this is the loss of trade because we just quit building homes. That's right. That's why now we have inventory issues where there's just, I think this has contributed to the situation we're in now where housing is hard, is because it had such a financial impact that just the supply just got disrupted and we're still paying the price for some of these decisions.

21:37Brian Preston:And so what's the key takeaway? What things should you take away from this? Don't ever stretch yourself too thin or don't get too lean on cash. Don't buy into the hype. Oh, well, they're not making more land. You can't lose money on real estate. So you need to buy as much as you can. You need to lever up as much as you can. You need to put as little down and borrow as much as possible. If you find yourself in a situation where people are trying to convince you to make financial decisions that don't even pass the common sense test, your spidey sense should start going off that maybe this is not what I need to start doing.