Thirty years ago the market crashed 23% in one day. It’s everyone’s worst nightmare – seeing their savings get cut in a quarter overnight. This is obviously traumatic so it’s rational to worry about such an event. There are important lessons in big traumatic events like this so let’s dive deeper.
I have a simple recurring theme about life and markets on this website – life is mostly just a boring trend of similarly monotonous stuff that gets jarred loose every once in a while. Life can feel like a series of cycles, but it’s more like a big boring trend that gets a little out of whack on rare occasion before coming back to trend. The markets aren’t so different. But what most people don’t tell you about the markets is that the big downward busts are usually preceded by big upwards booms.
In the case of 1987, the stock market went through an extraordinary 10-month boom of 35% before Black Monday happened. But here’s the interesting thing – if you’d put $1,000 into the stock market on January 1, 1987, and told yourself you would not look at it for a year then you had an account balanced of $1,000.5 on January 1, 1988. 1987 sure was boring, huh?
Or what about this? If you had purchased stocks at the top of the market in 1987 and just held on through the bust then it took just 19 months for you to break-even. That’s not too shabby.
Now, in fairness, life isn’t so easy. Maybe you were planning to retire in 1998. Maybe you had a medical emergency in 1988. Who knows? Our lives tend to be a series of short-terms and our assets tend to be more long-term so blending that asset/liability mismatch is a big problem for anyone buying financial assets. Telling people to just “buy and hold” through market crashes doesn’t always mesh with how life actually plays out. So what can we glean from all of this?
