The Last Time the Stock Market Started a Year This Badly Was 2022. Is Another Crash Coming?

As of Monday's close, the S&P 500 has fallen by about 15% this year (although the index regained about half of that after President Donald Trump put most of his tariff plan on pause). The index is coming off two straight years of gains in excess of 20%, so a bit of a slowdown was arguably overdue. However, investors likely weren't expecting a decline this sharp out of the gate for 2025, especially with the markets initially reacting favorably to Trump's November election win.

The market's decline is no mystery -- investors around the world are worried about the impact that global tariffs will have on businesses across all sectors. But is a full-blown market crash coming, and what should investors do amid all this uncertainty? Let's take a closer look at what your best approach may be from here on out.

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The last time the market started off this shaky was in 2022

The past two years have been great for investors, but before that, in 2022, the market went into a free fall. That year, the S&P 500 fell by more than 19% as the boost companies got from the pandemic-fueled spending faded, and businesses were cutting jobs as many of them realized they overestimated demand. Plus, rising inflation was a growing problem.

The S&P 500 fell by a little less than 5% during the 2022 first quarter. This year, the index was down by a similar amount at the end of March -- about 4.6%. The tariffs announced on "Liberation Day" earlier this month, however, have led to an even broader fall in the markets.

Whether you believe the market is in the early stages of a full-blown crash will likely depend on how serious you believe Trump is about tariffs. If it proves to be a negotiating tactic (as of April 9 that seems very plausible) and they end up going away, the impact could being short-lived, similar to how 2020 started when the pandemic crushed the S&P 500. The index fell by 20% during the first quarter, but rebounded after government stimulus was adopted, and the index finished the year up 16%.

If, however, tariffs are imposed after a 90-day pause, investors may want to brace for the possibility of a recession. The last recession lasted from late 2007 through until mid-2009. During that stretch, the S&P 500 tumbled more than 36%.

How should investors prepare for a possible market crash?

If you're worried about a market crash, you can reduce your risk while remaining invested in stocks. A good option to consider is putting money into exchange-traded funds (ETFs), which can help you diversify your holdings through a single investment.

An ETF that may be particularly attractive right now is the iShares Core High Dividend ETF (NYSEMKT: HDV), which yields 3.4%. The dividend income you earn from that investment can help offset losses in the stock market and provide you with some valuable steady cash flow. The fund invests in solid, blue chip stocks with strong fundamentals, including ExxonMobil, AbbVie, Procter & Gamble, and many other big names investors will be familiar with. In total, the fund has 75 holdings.

So far this year, the ETF has indeed provided investors with some valuable stability, proving to be a safer option than the S&P 500.

^SPX data by YCharts

The markets may be down, but you don't need to sell your entire portfolio

Whether you're a retiree or an investor with a lot of years to go, staying invested in the market may still be a good idea. Things can change quickly as the market's surge yesterday showed, and trying to time the ideal moment to invest could lead to you missing out on gains along the way.

Instead, it may simply be a good time to reevaluate your portfolio and move away from high-priced stocks and into more reasonably priced investments, including ETFs and dividend stocks, which may not be as vulnerable to large corrections as growth stocks. By reducing your overall risk, that can better protect your portfolio, even if a crash happens.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie. The Motley Fool has a disclosure policy.