If a Stock Market Crash Happens, History Says This Is How Long It Could Take Investors to Recover

Given that the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) are all trading just a few percentage points off record highs, some are worried things could turn south soon. And they're wondering: If a stock market crash is coming, how long might it take for my portfolio to recover?

First, I want to get something pretty important out of the way. While a crash is always possible, don't assume one is around the corner based solely on the market setting record highs. It's a neat trick our minds play on many of us, but a market setting record highs isn't a particularly fragile situation. In fact, data says otherwise.

Investment firm Dimensional Fund Advisors looked at stock market data from 1926 through 2022 and found that a year after a new record was set, the market was higher 81% of the time by an average of 13.7%.

Since 1957, the S&P 500 has taken a little over 4 years on average to recover from a crash

Still, a crash -- a decline of 30% or more -- could still come, so what does history tell us about how long it might take to recover if one does?

Image source: Getty Images.

Since the index was expanded to its modern format in 1957, the S&P 500 has taken an average of 4.3 years to recover from six crashes. But that average hides a pretty significant range. The fastest recovery on record in that time was after the COVID-19 crash, when the S&P fell almost 34% in a month, then hit a new high about six months later.

On the other end, you have a crash in 1973, which took 7.5 years to recover from and slightly edges out the dot-com crash's 7.2-year recovery. However, the latter was extremely short-lived. Just a few months later, the global financial crisis hit. The stock market took about 5.5 years to fully recover from that.

Of course, these stats just talk about getting back to where you were and don't account for inflation. A portfolio getting back to where it started on paper doesn't mean it has the same purchasing power it had before a crash. On the other hand, the figures also don't account for dividends, which would help speed your portfolio's recovery.

Investors should expect a 30%+ crash about once a decade

The fact is, major market downturns are a part of life as an investor. You can expect a roughly 10% dip about once a year, a 20% drop about once every four or so years, and a crash of 30% or more roughly once a decade or so.

But just as you can expect these dips -- even if you don't know when -- if history has anything to teach us, it's that you can reliably expect the market to recover, and then some. That's great news in the long run. With a long enough time horizon, even a 30% decline won't matter nearly as much as it might seem to in the moment.

Of course, that's not true for those nearing retirement. Generally, money you need within a few years shouldn't be invested in the stock market -- you don't want to be forced to sell shares to get money you need right after a 25% drop. These funds should be parked somewhere like a high-yield savings account, a money market fund, or invested in something like short-term Treasuries held to maturity. You're trading the potential for high returns for safety, predictability, and access.

Owning a diversified set of cash-generating businesses makes it easier to avoid panic selling

For the rest of your investments, the best approach is to own a diverse set of strong businesses that you believe in -- businesses with real cash flows, defensible moats, and competent leadership. And when a crash does come, if you are invested in companies like this, you will have a much easier time avoiding arguably the biggest mistake you can make -- panic selling. You'll instead be able to stay invested and look for stocks selling for bargain prices. Patient, steady investing has always been the key to success over the long haul.

Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.