Lessons Learned from 1987's Black Monday | The Informed Investor 16

Episode 16: Can you imagine another "Black Monday" in the stock market?

On October 19, 1987, the S&P 500 plunged 20.5%, the biggest single-day drop in history.

Panic selling occurred in markets around the world. A new product from US investment firms, known as "portfolio insurance," had become popular and it accelerated the crash's pace as initial losses led to further rounds of selling, according to the US Federal Reserve. https://www.federalreservehistory.org/essays/stock-market-crash-of-1987

Today, such a massive market decline may seem impossible to many investors. That's probably because the event itself led to significant reform in how the stock market operates.

After Black Monday, regulators developed new rules, known as circuit breakers, allowing exchanges to halt trading temporarily in instances of exceptionally large price declines. The goal was to help restore a well-functioning in the midst of a crisis.

Among the many lessons learned from Black Monday is the importance of investor resilience.

From January through August of 1987, the S&P 500 climbed more than 40%. After Black Monday, it was suddenly under water. But by the end the year, the S&P 500 finished with a 5.2% gain—which hardly seemed possible on October 19.

The lesson is that markets usually overcome what at the time seem like unprecedented challenges. Black Monday in 1987, the Asian Financial Crisis of 1997–1998, the dotcom bust of 2000, the Global Financial Crisis of 2008, COVID-19 in 2020—markets weathered them all.

Each crisis can feel like the end of the world when it happens, yet the stock market has recovered after each crisis.

Remember what happened in 2020: The S&P 500 finished the year with a gain of 18.4% even after plummeting at the start of the pandemic.

Research shows it's virtually impossible to predict where the market will go today, tomorrow, or anytime in the future.

So nobody really knows when or whether there will be another Black Monday. The takeaway for long-term investors is to stick with your plan if the market drops, knowing stocks can rebound sooner than you might think.

In Episode 16 of "The Informed Investor," Dimensional's Mark Gochnour, Head of Global Client Services, Wes Crill, PhD, Senior Client Solutions Director, and Jake DeKinder, Head of Client Communications, crank up their time machine to look back at Black Monday and look ahead to how investors should handle a massive drop if one happens again.

LINKS FROM TODAY'S EPISODE:

The Informed Investor on YouTube https://www.youtube.com/playlist?list=PLCyJr6FFig-h1mA7rVP7Mbk0irFw2wA90

Mark Gochnour on LinkedIn https://www.linkedin.com/in/mark-gochnour-9a23598a/ Wes Crill on LinkedIn https://www.linkedin.com/in/wes-crill-77a49417/

Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-dekinder-cfa-4105b98/

Learn more at https://www.dimensional.com/