Stock Market Crash: Understanding Black Monday
“On Black Monday, 36 years from last Friday, the Dow Jones Industrial Average fell about 23% – a stock market crash. If the same percentage drop were to happen today, it would be about 7,885 points. I lost millions that day, and so did many others. Of course, today is not 1987.”
That’s the first paragraph from an article on a major financial news site. Scary, isn’t it?
For those who may not be familiar, “Black Monday” is a term that refers to October 19, 1987, a significant date in the history of the financial markets. On this day, the Dow Jones Industrial Average experienced a notable downturn, dropping 508 points, which marked a -22.61% decline.
While this event is often cited as a classic example of a stock market crash, it’s important to view it in a broader context. Adjusted for today’s market values, a similar decline would equate to about 7,885 points off of the Dow.
However, the purpose of revisiting Black Monday is not to instill fear about investing in the stock market. Rather, it’s to provide a historical perspective that can help investors understand market volatility.
This event serves as a reminder of the market’s cyclic nature and the importance of long-term, strategic investing. It highlights the necessity for investors to be well-informed and prepared for market fluctuations, rather than being deterred by them.
Debunking Market Timing Myths
The author of the excerpt from the beginning of this post admits he and many others “lost millions” on Black Monday. I mean, how could you not lose a lot of money when there is a stock market crash of 23% in one trading day? The author then explains why today’s market resembles 1987. His advice? Market timing, of course! This guy lost millions and is now much smarter, so we should listen to him.
Analyzing the 1987 stock market crash: A Positive Year-End Twist
While so many focus on Black Monday and the 23% decline, they fail to mention how 1987 ended. The Dow, assuming reinvested dividends, finished that year +2.44%. You read that right. The Dow had a positive return in 1987, despite the stock market crash.
Therefore, my question is, how did this guy lose millions when the market finished positive for the year? The answer is rather than sticking to a reliable strategy, he reacted to his emotions.
The Power of Emotions in Financial Decisions
Our emotions, especially when it comes to money and investments, play a powerful and often underestimated role in decision-making. On Black Monday, driven by fear and uncertainty, numerous investors made the hasty decision to sell off their stocks. This reaction, though understandable in the face of falling prices, resulted in them locking in their losses. It’s a classic example of emotional investing, where the immediate response to market downturns is to minimize losses, often without considering the long-term implications.
However, the story of Black Monday doesn’t end with the stock market crash. In fact, those who resisted the urge to sell and maintained their positions in the market experienced a notable turnaround. By the end of 1987, despite the severe drop earlier in the year, the market had recovered significantly. Investors who held onto their stocks saw their portfolios rebound, leading to positive returns for the year. This turn of events highlights a critical lesson in investment: the value of patience and a long-term perspective.
The impact of Black Monday thus serves as a crucial reminder of the importance of staying the course, especially in turbulent times. It underscores the need for a well-thought-out investment strategy that can weather market volatility. Instead of reacting impulsively to short-term market movements, a steady and informed approach is often more beneficial in achieving financial goals. This scenario illustrates that while our emotions are a natural part of our financial journey, learning to manage them effectively is key to successful investing.
The Risks and Fallacies of Market Timing
I’ve chosen to omit the link to the article in question deliberately, as it’s clear that the author’s primary objective isn’t to provide impartial financial advice, but rather to promote and sell subscriptions to various market timing services.
These services, which claim to predict the best times to buy or sell stocks, often become particularly appealing to investors during periods of market volatility. This appeal is largely driven by our emotional response to uncertainty in the financial markets. In times of fluctuation, there’s a natural desire to find a sense of control and security, and market timing services tap into this sentiment by promising a way to capitalize on market highs while avoiding the lows.
However, it’s important to approach such claims with a healthy dose of skepticism. The idea of timing the market to perfectly capture its peaks and avoid its troughs is a tantalizing one, as it suggests the possibility of enjoying the benefits of market returns without facing the inherent risks or the distress that can come with a stock market crash.
But the reality of market timing is far more complex and uncertain. The stock market is influenced by an array of unpredictable factors, from global economic shifts to political events, making it extremely difficult to consistently predict its movements. By focusing on these timing strategies, investors might miss out on the long-term growth potential of staying invested through the market’s ups and downs.
This is why it’s essential to be wary of strategies that claim to have cracked the code of market timing, as they often overlook the broader picture of investment principles and the importance of a diversified, long-term approach.
Long-Term Market Performance: Beyond Short-Term Volatility
Simply put, timing the market is impossible. Countless individuals have tried, and no one has successfully found a consistent system for timing the market. You’re more likely to experience inferior returns in attempts to time the market than if you buy and hold and accept market risk. As an example, the S&P 500 returned 9.90% annualized from 1990 through 2022.
Separately, when did it become acceptable for our major news outlets to position sensational advertisement as educational content? This article failed to mention the Dow Jones, from January 1, 1987, through the end of October 2023, is up +3,951%, assuming reinvested dividends. No timing needed!
Our Approach to Investment and Market Turbulence
Anytime there’s uncertainty surrounding your money, it can be scary. At RCS Financial Planning, we’ve seen a lot of difficult markets come and go. And we can certainly empathize with people who find the current environment troublesome and disturbing.
We’d like to help, if we can, and to that end, here’s what we offer: A cup of coffee, and a second opinion. By appointment, you’re welcome to meet virtually or over the phone with us. We’ll ask you to outline your financial goals – what your investment portfolio is intended to do for you. Then we’ll review the portfolio for and with you.