Yesterday marked the 30-year anniversary of when the financial markets were disrupted in a way never before seen. October 19, 1987 is infamously known as Black Monday. On that day, the US Stock Market (Dow) dropped 22.6%. That is the largest one-day drop the stock market has ever experienced.
This week’s Articles of Interest is an article published in Financial Planning Magazine by Lee Conrad, Suleman Din, and Maddy Perkins. It is appropriately titled Black Monday, 30 Years Later. In this article the authors share various numbers pertaining to that day, how to react when the market suddenly declines, and the likelihood of whether or not a loss of this magnitude could occur again.
No one really knows what caused the crash, but it does bring up the question, “What can we learn from that situation?”. Read on to see my thoughts regarding this.
In my opinion, a loss of this magnitude could certainly happen again. It’s the risk that we take to earn the return. Without the risk, the return would be minimal.
As the historical statistics show, stock returns and losses generally happen in a very quick manner in a handful of days, not slow and steady over time. And the good news is that the losses occur far less often than the gains. It’s because of these reasons that you must be present to win!
To the authors’ point, panic selling during tumultuous times like Black Monday is not a good idea. Doing so would indicate that you are trying to time when to get into and out of the market, which is often times a losing proposition. If instead, you maintain an investment strategy based on academic, historical, and Nobel Prize research, you can put yourself in a position to capitalize on those gains when they come.
So, the lessons learned from Black Monday are two-fold: First, stock returns are very unpredictable and quite honestly risky, but it’s this risk that allows you the potential to earn greater returns. Second, don’t concern yourself with the losses and try to avoid them. They will happen, but so will the gains which are larger and more frequent. Stay the course and capture the profits when they come. And I’ll even add in an extra bonus lesson: Don’t listen to the media. They only serve to stoke fear into the hearts of people so that you will watch their program. If you listen to the media, then they will have you believing in perpetual doom. Just because it’s raining today, doesn’t mean it’s going to rain for the rest of your life. As humans we’re wired to place a higher priority on the negative, but you have to fight against it.
I hope you enjoyed this weeks’ Articles of Interest. Please feel free to share any comments, questions, or experiences you have below.
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