Lessons From The Wall Street Crash Of 1987

Wall Street Crash Of 1987
Learning From The Past Can Help You Avoid Costly Mistakes In The Future

The Wall Street Crash of 1987, commonly referred to in the finance world as Black Monday, occurred on October 19, 1987 and saw a decline in the Dow Jones Industrial Average of 508 points, which was the largest one day drop in the Dow at the time.

While the exact cause for the sudden 22.61% decline has never been determined, the most sited reasons for the sudden drop are program trading, and market psychology. Although program trading has taken the majority of the blame for the crash in the public’s eye, the most likely cause of the crash was the psychology of the market at the time.

There have been many studies showing how investor sentiment and crowd behavior have influenced the market both positively and negatively, and the events of Black Monday highlight how market sentiment can be a powerful force.

The Wall Street Crash Of 1987: Possible Causes

Historically, panics follow periods of equally historic rises in stock prices. The largest crashes of the past century have followed rapid run-ups in stock prices in an already high market. It is crucial when trying to figure out the cause of a crash to look to the cause of the preceding boom.

The tax cuts implemented by President Reagan in the fall of 1986 helped an already high market rise by 50% in less than a year. This spectacular rise in stock prices due to these dramatic tax cuts may have created the boom that ultimately led to the Wall Street crash of 1987.

This run-up in stock prices, coupled with political events and scandal are often blamed for turning investor sentiment negative, and causing the market to crash.

Some experts have stated that the majority of trading done on Black Monday was by only a handful of financial institutions that were unloading their stocks at a rate severe enough to pull down the entire market.

The Wall Street Crash Of 1987: Position Yourself For Success In Any Market

So what is a small, retail investor to do in a situation such as this? The harsh reality of investing in the stock market as a retail investor is that if people with more money than you have more money to put to work against you, then there is the very real possibility that you will suffer losses to your investments.

You can, however, learn some valuable lessons from the Wall Street crash of 1987, and position yourself to reduce losses and even profit from a future crash, especially if you have a long-term investment plan, and can tolerate temporary market volatility.

The key to riding out even the most severe of market crashes is to develop an investment strategy that is focused on diversification, with an age-appropriate mix of stocks and bonds. A long-term investment strategy that utilizes dollar-cost averaging is also key to navigating even the choppiest of markets.

As you can see, whether you had invested at the “top” of the market when the Dow Jones Industrial Average reached 2,722 on August 25, 1987, or at the “bottom” an investor would have stood to make considerable gains with a long-term plan.