Stock Market Crash: How to React, Strategies and Mistakes

Falling prices on the markets trigger the same question for many investors: sell or stay invested? Those who understand the mechanics of market phases and know the most common behavioural mistakes make calmer decisions in turbulent times. This article explains what happens during a stock market crash and which principles have proven their worth historically.

A stock market crash is an abrupt, sharp drop in equity prices within a short period, often triggered by economic shocks, geopolitical events or collective selling panic. When an index falls by 20 percent or more from its last high over a longer period, this is referred to as a bear market. Both are part of the normal course of the markets.

Below, we explain how bear markets arise, how prices have developed historically after downturns, and which behavioural principles help investors avoid typical mistakes.

The key points at a glance

• Definition of a bear market: a decline in an index of 20 percent or more from its last high (common market convention, e.g. Handelszeitung).
• Historical frequency: bear markets have recurred repeatedly since 1928; historically they lasted around 9 quarters on average (source: Handelszeitung, overview of bear markets since 1928).
• Shortest downturn: the 2020 Covid crash lasted only around 5 weeks and ranks among the shortest yet sharpest downturns in history.
• Long-term SMI development: investors in the Swiss Market Index achieved a positive annual return in 40 of 53 years since 1969 (source: SIX/SMI data series).
• Core principle: no one can reliably predict the start, duration or low point of a bear market; this can usually only be recognised in hindsight.

What is a bear market and how does it arise?

A bear market is a market phase in which prices fall by 20 percent or more from their last high. Its counterpart is the bull market, in which prices rise predominantly over a longer period. Bear markets often arise from a combination of economic shocks, rising uncertainty and collective selling dynamics.

On the stock market, a fundamental distinction is made between bull and bear markets:

• A bull market is a phase in which prices rise predominantly over a longer period. Smaller setbacks are normal and are usually offset by new highs. Such phases are often marked by pronounced confidence.
• A bear market is the opposite. When prices fall by 20 percent or more, market participants speak of a bear market. A longer series of consecutive loss-making months can also characterise such a phase.

The causes of a bear market are varied. Often several factors act together, such as abrupt trade-policy measures, geopolitical escalations, energy and commodity price shocks, or uncertainty over central bank monetary policy. Then there is psychology: when uncertainty and fear rise, many investors tend to sell at the same time. This dynamic can put prices under additional pressure for weeks or months.

Two sober observations from market history help with classification:

1. Bear markets are not an exceptional state but a recurring feature of equity markets.
2. Every previous bear market has historically been followed by a recovery phase, although the timing was not foreseeable.

How have markets developed historically after stock market crashes?

Historically, broad equity indices have generally recovered over longer periods after downturns. When a recovery set in and how long a bear market lasted could not be determined in advance. The look back at history shows above all that such phases occur regularly and are not a historical exception.

The most formative bear markets include the 2007 to 2009 financial crisis, the dotcom correction of 2000 to 2003, and the 2020 Covid downturn. The range of durations is notable: the Covid crash, at around five weeks, was one of the shortest yet sharpest downturns in history, while other bear markets dragged on for several quarters.

Handelszeitung has in an overview listed the bear markets since 1928 in chronological order. This compilation makes clear that a bear market occurs from time to time and is not unusual. Historically, bear markets lasted around 9 quarters on average. A long investment horizon can therefore be relevant.

What remains important: no one can reliably predict when a bull or bear market begins. As a rule, this can only be recognised and analysed in hindsight. It therefore makes sense to prepare for various market phases rather than trying to predict individual turning points.

What does the long-term development of equity markets show?

The long-term development of broad equity indices has historically trended upwards despite intermittent downturns. For the Swiss Market Index, the following applies: since 1969, investors would have achieved a positive annual return in 40 of 53 years. This observation describes the past and is not an indicator of future developments.

Various analyses of price development on the equity markets over decades arrive at a similar picture: the overall development of the SMI trended upwards despite intermittent corrections within bear markets. Even those who entered during phases of high valuations were, over long periods, historically often in positive territory. From this, the principle is often derived: time in the market was historically more relevant than trying to time the market.

A key driver of this long-term development is that economies increase their productivity, companies bring forth innovations and economic interconnection grows. Other asset classes such as gold or real estate, by contrast, historically moved sideways even over longer periods.

These statements describe historical observations. Past performance is not a reliable indicator of future returns. Which asset classes and which weighting are suitable for you depends on your personal situation.

How should I react to a stock market crash?

Historically, it has proven sensible for long-term investors to stick to their original plan rather than act out of fear. Anyone selling into falling prices locks in book losses and risks missing the later recovery. Which approach fits depends on your investment horizon, risk capacity and personal situation. The following principles are intended for orientation, not as a recommendation.

Stay calm and keep your investment horizon in view

In a bear market, prices often fall over weeks or months. For long-term investors, it can make sense to maintain the original plan and not be guided by negative headlines. Thorough personal financial planning helps to make decisions in such phases based on your own horizon rather than on the mood of the day.

Avoid impulse selling

Many investors tend towards impulse selling out of fear. Historically, this behaviour has often led to worse outcomes, because book losses were realised and the re-entry was frequently missed. A common mistake is to sell in a bear market and thereby miss the start of the next upward phase. Psychologically, it is demanding to observe falling prices over a longer period and stick to the plan. Behavioural psychology plays a role in investing that should not be underestimated.

Review your diversification

Broad diversification across regions, sectors and asset classes can dampen a portfolio’s fluctuations. Rather than forecasting individual securities or sectors, diversification aims to make the portfolio more resilient to individual shock events. What a sensible spread looks like for you depends on your goals and risk capacity.

Secure liquidity

Anyone not reliant on their invested capital during a downturn does not have to sell at unfavourable prices. Sufficient cash reserves outside the portfolio reduce the pressure to act hastily during a stressful phase and make it possible to sit out temporary book losses. The Swiss pension instruments, in particular the three-pillar system and vested benefits accounts, can also play a role in this overall liquidity picture.

Which mistakes do investors most commonly make in a bear market?

The most common mistakes in a bear market are emotionally driven panic selling, the attempt to time the low point exactly, and abandoning broad diversification in favour of supposedly safe individual bets. All three patterns historically increase the risk of performing worse than a calm, long-term approach.

There is also the desire to find the perfect re-entry point. Since recoveries have historically often occurred suddenly and without warning, investors who waited for the supposedly ideal moment frequently missed a substantial part of the rebound. Rather than relying on timing, a structured approach focuses on your own investment horizon, an appropriate spread and sufficient liquidity.

For beginners who want to familiarise themselves with the basics, broadly diversified index products such as ETFs offer access that bypasses individual security decisions. Which solution is suitable for you depends on your situation and should be assessed individually.

When do equity markets recover after a crash?

A reliable forecast of when markets recover after a crash is not possible. Historically, indices reacted sensitively to decisions by central banks and governments, as well as to a stabilisation of economic conditions. When exactly a recovery sets in, however, can usually only be determined afterwards.

Market history shows that several factors interact: the monetary policy of central banks, the development of inflation, the economic situation and geopolitical events. Changes in these areas can turn the mood on the markets. Which combination triggers a recovery, and when, remains open in advance.

For this reason: rather than trying to predict individual turning points, it is more effective for many investors to set up a portfolio so that it can withstand various market phases, including periods of heightened volatility.

Frequently asked questions about stock market crashes

How should I react to a stock market crash?

Historically, it has proven sensible for long-term investors to stick to their original plan and not to act out of fear. Panic selling into falling prices locks in book losses and carries the risk of missing the subsequent recovery. Which approach suits you depends on your investment horizon, risk capacity and personal situation.

Should I sell during a crash?

Whether selling makes sense cannot be answered in general and depends on your individual situation. Historically, broad equity indices have mostly recovered over longer periods after downturns. Anyone selling into falling prices risks missing the often sudden rebound. This article does not constitute investment advice.

What is a bear market?

A bear market describes a market phase in which an index falls by 20 percent or more from its last high. Its counterpart is the bull market, with prices rising over a longer period. Bear markets are part of the normal course of equity markets and have occurred regularly throughout history.

How long does a stock market crash last?

The duration varies widely. The Covid downturn in 2020 lasted only around five weeks, while the bear market of the 2007 to 2009 financial crisis ran for several quarters. A reliable forecast of the duration or low point of a downturn is not possible; both can usually only be identified in hindsight.

Why are cash reserves important during a stock market crash?

Anyone not reliant on their invested capital during a downturn does not have to sell at unfavourable prices and can sit out temporary book losses. Sufficient liquidity outside the portfolio reduces the psychological pressure to act hastily during a stressful phase.

This article is for general information and does not constitute investment advice. Past performance is not a reliable indicator of future returns. Whether and how you adjust your portfolio depends on your personal situation.

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