What Happens in a Market Crash?

Yes, Market Crashes Happen

Let us not sugarcoat it. The stock market crashes sometimes. It has happened before and it will happen again. Here are some of the biggest drops in recent history:

• 2008 Financial Crisis: The S&P 500 dropped roughly 57% from peak to bottom.
• 2000-2002 Dot-Com Bust: The S&P 500 fell about 49% over nearly three years.
• 2020 COVID Crash: The S&P 500 dropped 34% in just five weeks.

If you are a parent with a newborn's Trump Account, these numbers might scare you. That is completely understandable. Nobody likes watching their child's money shrink on a screen.

But here is the rest of the story.

Every Crash Has Recovered

Every single one of those crashes was followed by a recovery. Not eventually. Fully.

• After 2008: The S&P 500 fully recovered by early 2013 — about four years. Then it kept climbing.
• After the Dot-Com Bust: It took until 2007 to recover. Then 2008 hit. But by 2013, investors who held through both crashes were in the green.
• After COVID: The S&P 500 recovered all losses in five months. It hit new highs by August 2020.

Why the No-Withdrawal Rule Protects Your Child

One feature of Trump Accounts that parents sometimes complain about is the no-withdrawal rule before age 18. You cannot pull money out during the growth phase (except for rollovers, excess contributions, or death).

But this restriction is actually one of the account's biggest advantages. Here is why:

The single biggest mistake investors make during a crash is selling in a panic. They see their account drop 30% and pull everything out. Then the market recovers, and they miss the rebound. Studies show that missing just the 10 best days in the market over a 20-year period cuts your returns roughly in half.

With a Trump Account, you cannot make that mistake. The money stays invested through the crash, through the recovery, and through the next bull market. Forced patience is a feature, not a bug.

Dollar-Cost Averaging Works in Your Favor

If you contribute to your child's Trump Account every month, you are practicing dollar-cost averaging. This is one of the most reliable investing strategies, and it actually benefits from market dips.

Here is how it works:

• When the market is high, your $250 monthly contribution buys fewer shares.
• When the market is low (during a crash), your $250 buys more shares.
• Over time, you end up with a lower average cost per share than if you tried to time the market.

A market crash actually lets you buy more of the S&P 500 at a discount. Those cheap shares then benefit from the recovery. This is why regular contributions through good times and bad produce strong long-term results.

What the Historical Data Shows

Let us look at what happened to a hypothetical child investor in the worst recent scenario. Imagine a Trump Account started in January 2000 — right before the dot-com crash:

• The market crashes in 2000-2002 (dot-com bust).
• It recovers, then crashes again in 2008 (financial crisis).
• It recovers again by 2013.
• By January 2018 (18 years later), the S&P 500 had still delivered positive total returns.

That child lived through two of the worst market crashes in modern history — and still came out ahead. Now add monthly contributions throughout those 18 years (buying cheap during both crashes), and the outcome improves significantly.

What Happens at Age 18 During a Crash?

Some parents worry: what if the market crashes right when my child turns 18?

Good news: your child does not have to sell at 18. At age 18, the Trump Account converts to a traditional IRA. The money stays invested. Your child can leave it in the same index fund as long as they want. There is no forced liquidation date.

If the market is down when they turn 18, they have several options:

• Leave it invested and wait for a recovery.
• Continue contributing to the IRA on their own.
• Convert to a Roth IRA — a down market actually makes this cheaper tax-wise.

The worst thing to do would be to panic-sell at the bottom. And since the money is now in an IRA with no mandatory distribution until age 73, there is no pressure to sell.

The Bottom Line

Crashes are scary. They are also normal and temporary. The S&P 500 has survived world wars, financial crises, pandemics, and recessions — and it has always reached new highs eventually.

Your child's Trump Account has three powerful defenses against crashes: 18 years of time, broad diversification across 500 companies, and forced patience through the no-withdrawal rule. Together, these make market crashes a speed bump, not a dead end.

To see historical return projections, read Expected Returns for Trump Accounts. To understand whether the government guarantees your returns, see Does the Government Guarantee Returns?