The stock market is scary because of crashes, drawdowns, not to mention price drops. Stock exchanges the world over lost about 10% in August 2015. Such corrections are frequent (about once a year).
Major crashes are much rarer. The crash of 1929 is probably the best-known stock market disaster in history: the US stock market plummeted in 1929, recovered a bit to plummet further in 1930, and crashed all over again in 1931 and early 1932. Stocks lost three quarters of their purchasing power, that is to say, a value divided by four. It is quite a bit scarier even than Donald Trump's hair.
And yet ... the ultimate stockmarket catastrophe has not had such long-term consequences. Drawdowns are always quoted from peak to trough, which makes them relevant only if you bought precisely at the top of the bubble to then sell exactly at the bottom. If you managed to do that, you almost deserve a medal. In real life, you do not buy exactly at the top and you do not sell at the very bottom. Moreover, you do not buy or sell all at once, but progressively, so you bought a little at the top and a little at the bottom.
The figure below shows how artificial the numbers may be. If you bought a year before the peak and sold a year after the trough, the loss would have been about ten percent — for an investment purely in stocks during the worst crash in the country's history. And with a portfolio three-quarters in stocks (not exactly an investment for wimps) over 1928–1933 there was a slight gain in purchasing power.
Figure: Loss of purchasing power over the periods 1929–1932 and 1928–1933, as a function of the stock allocation.
Did the crash have serious long-term consequences for investors? For those who got scared and sold everything, yes it was very bad indeed. As for the others, while this is certainly not something they enjoyed, celebrated with champagne or wished to go through even again, they did not lose everything in it either. Yes, market crashes are scary and nasty, but not necessarily as much as the headlines may lead you to believe. (Perhaps the worst thing about this market crash is that I could not get it to rhyme with "big bad wolf" and "Virginia Woolf" in my title.)
