Lessons From the Crash of 1987

The stock market falls for reasons we cannot foresee.

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The mood in my office at Shearson American Express on the morning of October 19th, 1987 can be best described as apprehensive. The Dow Jones Industrial Average peaked in August at 2,700 and had already dropped 15% from that high. On Friday, October 16th the Dow lost over 100 points. Clients were nervous and advisors were edgy as we awaited the opening bell. However, no one was prepared for the 500 point loss that was coming. In fact, it would be a couple days before we even knew the extent of the loss, as computers were overwhelmed by the trade volume that topped 600 million shares.

Today marks the 25th anniversary of the Crash of 1987. The stock market has posted 500 point losses in a single day since then and 600 million share days would be considered light by today’s standards. But the one day loss of 22.6% is a record.

In recognition of the anniversary, I want to reflect on what has been learned. Some people think they should have seen the crash coming and went to cash to avoid the loss. The crash of 1987 taught us this kind of guesswork is unnecessary to succeed at investing. Major declines in the equity market have historically been temporary. The S&P 500 index produced a compounded annual return of more than 8% from August 1987 (before the crash) through August 2012. Maintaining a position in equities proved successful through the crash of 1987, the tech wreck of 2000, and the panic of 2008.

The stock market falls for reasons we cannot foresee. The doom and gloom predictions you hear today may or may not happen, and the stock market may or may not drop because of them. Whatever happens, American companies have always looked for ways to remain profitable in the environment they find themselves and the stock market has historically gone on to resume its climb. To quote Peter Lynch, “The key to making money in stocks is not to get scared out of them.”

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