In stock market crash history, "black swan events" are usually what send the markets tumbling.
Black swan events are dreaded by all investors, and for good reason. By definition, it's an event with a severe impact that's almost impossible to predict. This is why black swan events are a recurring theme in stock market crash history.
The term was coined by trader, statistician, and author Nassim Nicholas Taleb in his 2001 book, "Fooled by Randomness." In 2007, another Taleb book, "The Black Swan," further popularized the term.
One great example of such an event in stock market crash history is the 2008 financial crisis. The "black swan" in this case was the implosion of the subprime mortgage market. Banks made more than $2 trillion worth of home loans to borrowers who could not afford them.
When those borrowers began to default in large numbers in 2007, the housing bubble burst. The shock of plunging home prices on the financial system triggered the crisis that caused the 2008 stock market crash.
Take a look at this stock market crash history graphic compiled by Call Levels. It describes nine black swan events and their impact on the markets. Below I have some recommendations for investors on how to deal with black swan events.
How 9 Black Swan Events Influenced Stock Market Crash History
@Credits: Call Levels
What Investors Can Do About a Black Swan Event
Investors can't know exactly when a black swan event will trigger a stock market crash, but the possibility is always lurking out there. So investors need to integrate that possibility into their investing strategy.
That's why Money Morning Global Credit Strategist Michael E. Lewitt advises that investors keep between 10% to 20% of their total assets in some form of gold, either physical gold or a gold ETF (exchange-traded fund) like the SPDR Gold Trust (NYSE Arca: GLD). He says investors can also increase their cash positions.
Meanwhile, Money Morning Chief Investment Strategist Keith Fitz-Gerald cautions investors never to bail on stocks entirely, whatever the circumstances. Instead, he recommends that investors seek out quality stocks that, ideally, are undervalued, have strong balance sheets, pay a dividend, and have potential for growth.
"Selling out when stocks are falling may feel good, but doing so takes you out of the game," Fitz-Gerald explained. "Being able to purchase more income-generating shares, year after year, at cheaper prices clearly outweighs the downside of 5% losses on principle each year. Missing out on upside is always the far more expensive proposition over time."
Just last week Fitz-Gerald discovered a stock that fits these criteria perfectly. This company has almost doubled its customer base over the past 12 months and is on the verge of announcing earnings growth of 325%. That, Fitz-Gerald says, should send shares skyrocketing…
About the Author
Dave has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.