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Black Monday 30 years on: what can it teach us about investing?

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Thirty years ago today, stock markets experienced ‘Black Monday’, a day that is etched into the collective memory of investors everywhere and may still be a deterrent to those considering stock market investment.

19 October 1987 saw the biggest daily fall in the level of the S&P 500 and FTSE 100 over the last 30 years (although the Global Financial Crisis saw bigger cumulative losses). The S&P 500 index plunged 20.5% and the FTSE 100 dropped 10.8% in a single day.

Data from Seven Investment Management (Seven IM) shows that the next worst days also came in October – 10 October 2008 for the FTSE 100 and 15 October 2008 for the S&P 500. Both indices saw declines of around 9%.

Black Monday still has some lessons for investors today:

  1. The importance of diversification

Seven IM points out that while the FTSE 100 and S&P 500 were down 33% and 28% respectively in October and November 1987, gold was up 8%. Justin Urquhart Stewart, co-founder and head of corporate development, said: “A well designed portfolio, like a well-made yacht, can help ride out the storms and sail through troubles to the calmer seas beyond.”

  1. Be worried when things are going very well

Schroders points out that Black Monday came after a period of sustained gains. Stockmarkets in the US and UK had been growing at a pace of more than 30% a year in the five years up to Black Monday. Valuations were at record highs.

  1. It pays to wait out a crash

Urquhart Stewart said: “We may remember Black Monday because of its doom-laden title, but look at the FTSE 100 year-to-year and it looks as though it didn’t exist. The fact is that the markets ended up higher at the end of the year than at the beginning, despite the crash.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, said that in 1987 a £10,000 investment was reduced to £6,610 in a matter of weeks, but by 1997 that investment would be worth £32,690, and today it would be worth £104,340.

Khalaf said: “Stock market crashes are a bit like the Spanish Inquisition – no-one expects them. The 1987 crash is renowned for the speed and severity of the market decline, and undoubtedly when markets are plunging so sharply, it’s hard to keep a cool head.

“Hindsight clearly shows that the best strategy in these scenarios is to sit tight and not engage in panic selling. Time has a tremendous healing power when it comes to the stock market, and price falls are typically a buying opportunity. The stock market is an unusual trading venue, in that buyers tend to stay away when there’s a sale on.”

  1. Don’t forget dividends

There is real value in rolling up dividends. Since the peak of the market in June 2007, Hargreaves Lansdown figures show £10,000 would only have grown to £11,890 based on stock price movements alone. But once dividends are counted and reinvested, that rises to £17,230.

How different are the circumstances today? Khalaf said: “The Footsie has recently reached a new record high, which prompts the question of whether it’s heading for a fall. There are always reasons to worry about the stock market and now is no exception. The Chinese credit bubble is front and centre of concern, along with increasing global protectionism, and the disturbing prospect of World War Three being started on Twitter.”

However, he also sees reasons to be positive, with the global economy moving up a gear, borrowing costs remaining low, and stocks facing little competition from bonds and cash when it comes to offering a decent return. He added: “The market will of course take a tumble at some point, and it’s impossible to predict when. This makes being bearish an easy game, because you only have to wait so long before you are eventually proved right. The big question though, is how much have you lost out on in the meantime by sitting on your hands?”

It is always difficult to time the markets. As such, it can be better to drip-feed money into the markets through regular savings. This way, you buy in at a variety of different price points and it can help smooth your investments over time.

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