Two market crashes, two different outcomes

Tuesday, October 24, 2017|Managing Investment Risk|
  • Two Market Crashes Two Different Outcomes

Situation:

You worry about the lasting effects of a severe market crash.

My View:

Worrying constantly does not contribute to smoother investing.

Solution:

Design and follow your long-term asset mix that manages risks.

 October. This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February.” — The sage words of Mark Twain (1835–1910)

October is often referred to as ‘market crash’ month. Two particular crashes, decades apart, contribute to this lofty label. It has been well earned and deserved. Let’s delve into the more colourful details.

Great Crash of 1929 at age 88
The 88th anniversary of the Great Crash is imminent. Here is a brief look back at October 29, 1929, known as “Black Tuesday”. The Dow Jones index plunges near 31 points to 230, an 11.7% collapse. At one point during the day the Dow is down 48 points, or 18.5%.

Trading volume of 16.4 million shares shatters the old record by nearly 4 million, set just five days earlier. Three million shares are traded in the first half hour alone. This is more than an entire day’s typical volume of just a few months earlier.

This volume overwhelmed the Stock Exchange. Huge blocks of stock were flung upon the market for whatever they could fetch. Sell at any price.

October is often referred to as ‘market crash’ month. Two particular crashes, decades apart, contribute to this lofty label.

The carnage does not just strike stocks like Transamerica, which implodes from $62 to $20. It also mows down market leaders such as AT&T which loses (12.1%); General Motors (15.8%); IT&T (19.3%); Standard Oil of New Jersey (20.1%) and duPont (22.7%).

The market has now lost 34% in just 13 trading days; 40% since the high of September 3, 1929. The Great Crash is firmly taking hold. A tumultuous time develops to say the least. It takes until late 1954 for the Dow to regain and surpass its market top reached in 1929. Now that is long-term investing patience. Just a paltry 25 years.

Crash of October 1987 at age 30
The 30th anniversary of the event known as “Black Monday” just flew by last week! Yes, the crash of October 19, 1987 was clearly humming a distant 30 years ago. The stock market waterfall began in Hong Kong and then spread to Europe and North America. The Dow plummeted an eye popping 508 points in one day to close at 1,739.

It was a monumental day in market history. Investors were stunned at the 22.6% one day drop. However, it is notable to observe that within one year of the crash, the Dow had retraced this heart stopping loss. Last week the Dow crossed 23,000 for the first time. Roughly a ten-fold rise from the level just prior to the crash of 1987.

Most investors who lived through Black Monday don’t remember it well. The sudden crash came as a surprise to practically everyone. The luxury of computer tracking was in its infancy. Reading the Dow tape at the back of brokerage houses was the entertaining way to stay plugged in those days.

An avalanche of buy/sell orders slowed the trading system to a crawl. Many investors were mesmerized and shell-shocked by the day’s unprecedented events. The Dow has had bigger point drops since then, yet none greater in percentage terms.

What to do
I’ve touched on one crash that came back to break even after 25 years and another that required a mere one year. What’s an investor to do to prepare for and weather such diverse market outcomes? First off, nobody knows how long a crash will take from start to finish. Secondly, don’t bet on selling the farm to be your saviour.

My recommendations for your mission are five-fold:

  1. Save and invest regularly to reach realistic objectives.
  2. Implement your diversified, long-term asset mix.
  3. Rebalance occasionally to your original asset mix targets.
  4. Stick to owning quality investments.
  5. Never chase returns.

I don’t know when the next market crash will present itself. I suggest that you factor in such an event becoming a part of your investing. Prepare your plan of action by planning your mission similar to the one I just highlighted.

Worrying and fretting about your finances does not improve the prognosis for success. I prefer to keep my mission simple and straightforward. I suggest you do the same, so be patient. Really patient!

About Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA  My expertise in the investment and financial advisory profession began in 1972. I graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971. I then attended the University of British Columbia, graduating with the MBA in 1972. I have attained the “Discretionary Portfolio Manager” professional designation. I am committed to offering clients the highest standard of personal service by providing prompt, courteous and professional attention. My advice is objective, unbiased and without conflicts of interest. I’m part of a team that delivers comprehensive services and best value in managing client wealth.

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