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For some of us it is hard to believe, but this year marks the 30th anniversary of the 1987 stock market crash. Stock market losses were so great on Monday 19th October that it has since been known as Black Monday. The Dow Jones fell 22.6%, which remains remains the biggest percentage drop in a single day in US stock market history. The drop from its peak on 25th August was even more pronounced at 36%.
Experts are drawing comparisons between the economic situation prior to the 1987 crash and today. Stocks were riding high in a bull market that had begun in 1982 but inflation was starting to creep up along with interest rates and the US and Germany were engaged in trade wars. With the Dow Jones currently at all-time high (it passed 23,000 this October, having started the year at under 20,000) many are saying that what goes up must come down and a crash similar in magnitude to that of three decades ago is on the cards.
As an investor, should you be preparing for a major market correction? And how?
Well, firstly, the markets have evolved since 1987 with lessons learned leading to checks and balances. Circuit breakers were introduced by the US Securities and Exchange Commission after the 1987 crash giving markets the ability to shut down trading if large declines are recorded. Since 2012, if the S&P 500 stock index drops more than 7% before 3.25pm on any given day, trading is halted for 15 minutes with further pauses possible if stocks continue to drop.
Technological changes also make a repeat of 1987 less likely. In 1987 all trading was done over the phone. Since then the speed of computer technology has transformed the markets and robot trading minimises the risk of emotional trading, thought to have been a huge trigger back in 1987.
Others argue that market positivity right now is based on corporate earnings and that the euphoria and optimism that existed prior to Black Monday are absent today, reducing the risk of a crash.
The fact is that if you look online you will find warnings from many experts that a crash is imminent and others who contradict that view, arguing that a major correction will not materialise. The fact that these polar views exist is totally normal, if markets were predictable then we’d all be coining it in!
How do you as an investor deal with speculation of a crash? Well, probably by doing nothing. For the majority of investors, a buy and hold strategy is the one that works the best. Even after the losses of Black Monday, the market started rising later in the week and stock charts from the time show that those who toughed it out without panic selling did ok. Research shows that over the long term, stocks recover and that investing in the market is a proven way of building wealth. Of course, as ever, the key is in diversifying your assets and putting together a balanced portfolio.
If you have concerns about your portfolio, why not book an appointment with one of our professional financial advisers to see if you would benefit from rebalancing?
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