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What the 1929 Stock Market Crash Can Teach Investors

A lot has changed in 90 years, but stocks can still plunge

spinner image Bankrupt investor Walter Thornton tries to sell his luxury roadster for $100 cash on the streets of New York City following the 1929 stock market crash.
The 1929 Stock Market Crash led to the Great Depression, one of the biggest economic crises in American history.
Bettmann/Getty Images

Ninety years ago, Wall Street laid an egg.

On Oct. 24, 1929, the Dow Jones Industrial Average began a slide that saw a 12.8 percent plunge Oct. 28 and a 11.7 percent decline the next day.

By the end of the bear market in 1932, the Dow had plummeted 89 percent from its 1929 high, erasing all the gains of the Roaring Twenties, and the nation was in the depths of the Great Depression.

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Historians have found plenty of reasons for the Great Crash, ranging from excessive speculation to a slowing global economy to shady investment practices. Even though the world is very different than it was in 1929, we can learn plenty of lessons from the Great Crash and the economic disaster that followed.

4 always-good pieces of advice

1. Diversify. Even though stocks cratered in the 1929 crash, government bonds were safe havens for investors. A position in bonds probably wouldn't have shielded you completely from stock-market losses, but it certainly would have softened the blow.

2. Keep cash in reserve. Your most important investment is you, and if you lose your job, you'll need some savings to enable you and your family to stay afloat.

In addition, a cash stash can help you pick up bargains in the aftermath of a market decline. During the Depression, mutual fund pioneer John Templeton invested $10,000 and bought shares of 104 companies for less than $1 a piece. He sold them for around $40,000 near the end of World War II.

3. Never bet more than you can lose. Buying stocks on margin, often with as little as 10 percent down, was common in the runup to the crash.

If your stock rose 10 percent, you would double your money. If it fell 10 percent, you would lose your entire investment.

Some mutual funds put their entire portfolios on margin — and in turn, other funds bought those on margin.

4. Try not to get caught up in hysteria. Stocks had had a long runup to the 1929 crash, and their prices, relative to earnings, were extremely high.

High-tech stocks of the day, such as Radio Corporation of America, were particularly pricey. Soaring prices tempted more and more people to climb into the market, even those who should have known better.

"Stock prices have reached what looks like a permanently high plateau,” Yale economist Irving Fisher said in September 1929.

Safeguards put in place

Some of the problems that made the Great Crash morph into the Great Depression have been alleviated.

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In 1929, it was perfectly possible to save prudently in a bank savings account and lose most of your money because bank deposits weren't insured. The Federal Deposit Insurance Corp. now insures bank deposits up to $250,000 per bank per person and often more depending on how the deposits are titled.

Deposit insurance from the federal government also covers most credit unions.

spinner image cartoon of a Bear Market running wild on Wall Street during the 1929 stock market crash
Everett Collection Inc/Alamy Stock Photo

The Federal Reserve Bank now regulates margin loans: The current maximum amount of margin is 50 percent. In other words, at least half of the stock you buy must be with your own money.

The Securities Act of 1933 cracked down on fraud in the financial services industry and required publicly traded companies to give investors information about their financial condition. And the Investment Company Act of 1940 unified rules for mutual fund companies and limited the purchase of securities on margin.

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No barrier to stockbrokers in banks

However, some of the laws that came out of the Great Depression have been eased. The portion of the Glass-Steagall Act that required commercial banks and investment banks to be separate entities was repealed in 1999. The 1933 law was passed because banks that speculated on their own accounts collapsed in wake of the Great Crash.

And if you want to invest with insane amounts of leverage — Wall Street's current euphemism for margin — you still can do so, thanks to exchange-traded funds that promise to rise or fall as much as three times as an underlying index, such as the Standard & Poor's 500 stock index.

Finally, no one can guarantee that stocks and the economy won't swoon again.

The most recent bear market, which lasted from 2007 to 2009, clawed the S&P 500 for more than 50 percent of its value and saw millions of people default on their mortgage loans. Only immediate government action kept many major banks from failing.

Although modern governments try to stabilize the economy in a crisis, those policies can change. Your best defense is to diversify your holdings, keep some cash for a rainy day — and always try to avoid getting caught up in the investment manias of the day.

John Waggoner has been a personal finance writer since 1983. He was USA TODAY's mutual funds columnist from 1989 through 2015 and has worked for InvestmentNews, Kiplinger's Personal Finance, the Wall Street Journal and Morningstar.

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