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Lessons from Black Monday

Thirty years ago the stock market cratered. What if it happened today?

Black Monday Happened 30 Years Ago Oct. 19. Could it Happen Again?

Maria Bastone/AFP/Getty Images

The stock market crash of Oct. 19, 1987 — Black Monday — was caused by speculation, overvaluation and market psychology.

On Oct. 19, 1987, global stocks plunged. In the U.S., the Standard & Poor's 500 lost 20.5 percent, their largest one-day percentage loss ever suffered on Wall Street. Black Monday, as it is called, was caused by a combination of program trading (automated, computerized selling), speculation, overvaluation and market psychology. Though regulations were put in place to prevent such a severe drop from happening again, markets are hard to control, as illustrated by the flash crash of May 6, 2010, when the S&P’s 500 briefly dropped about 8 percent. Similar crashes or even greater, perhaps over a few days, could happen.

Here are three reasons it could be much worse now:  

You are 30 years older

Three decades ago, most of us had much smaller portfolios, and most of our net worth was in future earnings from our careers. So although stocks gave up a fifth of their value, it hurt us a whole lot less than it would today, when we have far less time to recoup market losses and fewer years of earning a living.  

So a plunge today would be much more painful than in 1987. If markets don’t rapidly recover, you could be forced to dramatically change your lifestyle.

Digital media would intensify the pain

In 1987, you likely heard about Black Monday on the radio or TV. Or maybe not until the next day, when you saw the morning newspaper. Today you get alerts and market updates on your smartphone and experience the plunge minute by minute. In the era of the 24-hour news cycle, market commentators will analyze and extrapolate ad nauseam, declaring the arrival of a new paradigm. Social media will be buzzing and tweeting and spreading anxiety like the flu. And with the fear comes the inevitable herd effect of panic that compels selling among investors when prices plummet.  

It’s easier and cheaper to panic today

It was harder to sell in 1987. Commissions were high, and most mutual funds had sales loads. And you had to call your broker or visit the brokerage office to make the trade. That allowed you to at least spend a little time to truly consider your next step. Today, all you need is your PC or smartphone and you can sell your stocks and mutual funds quickly — and for little or no cost.  

My advice

Of course, stocks did recover after the crash, and those who bought after the close on Black Monday have earned an annualized 10.76 percent return. Even if you bought the Friday before the collapse, you got a 9.91 percent annualized return. Both are measured by the total return of a Vanguard S&P 500 index fund through Oct. 11, 2017.

The inescapable truth is that investing in stocks and stock funds will always be risky. Accept the fact that stocks will plunge again and you may not have a 30-year investment horizon before you need the money. Stocks probably won’t plunge in the same manner as on Black Monday, but a plunge will happen. Also accept that understanding this intellectually is not the same as experiencing the emotional pain.  

With the stock market bull being over eight years old, ask yourself if you are taking on too much risk. What would a 50 percent or more decline mean to your lifestyle and retirement if markets don’t quickly recover? What would you have to give up, and how much would it hurt? You might want to consider a more conservative allocation so you would be emotionally prepared to buy stocks after the next plunge.