Black Monday, October 19th, 1987

On October 19th, 1987, U.S. stock markets suffered a gut-wrenching plunge still remembered as “Black Monday” on Wall Street.

The Dow Jones Industrial Average fell 508 points, then a record. The 22.6 percent one-day drop still stands as the biggest percentage loss since the New York Stock Exchange reopened in December 1914 after being shut for four-and-a-half months in the run-up to World War I.

The broader Standard & Poor’s 500 index  fell 20.4 percent while the Russell 2000 index of small caps dropped 12.5 percent. Both are records still

Stocks lost a fifth of their value in a single day

It was the event all stock investors fear. A large loss of wealth

The crash of 1987 has a lot of lessons for investors, but one important one is that time is on your side when it comes to investing.

If you were a dip buyer and stepped in right at the close on 19th October 1987 and held through now, your annualized return, not including dividends, would have been an impressive 9.2%. 

But what if you had the worst possible timing and decided to get long the market on the Friday before Black Monday? Surely, you would have felt pretty stupid on Monday afternoon. 

However, if you were able to lick your wounds and put the pain of those losses behind you, and hold through the present, the annualized return of your investment would have still been 8.5% (not including dividends). 

Sure it’s not as good as you would have done if you waited a couple of days and put that money to work after the crash, but it’s still nothing to turn your nose at.  When making investment decisions, sitting on your hands sometimes is one of the better decisions you can make.

This reminds us of a famous quote by Edwin Lefevre in his classic book Reminiscences of a Stock Operator (read it today if you have not yet)

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

“Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money”

If you can sit tight for the long term even 22% drops in a single day disappear.

Consider this long term chart of the Dow Jones Industrial Average

It’s hard to even see Black Monday and when you do work out where it is, it doesn’t look like too much trouble at all.

Remember this chart and what investing in stocks looks like long term. Don’t lose focus on this. Stay the term and let the market make your wealth for you.

The next time you look at your portfolio and become worried because it has fallen 5%, or that you haven’t made any money in 3 months, put it in perspective, and remember to play the long game.

In the long run there is nothing that builds wealth quite like investing in stocks. And there is nothing that destroys wealth quite like jumping in and out of the stock market on every twist and turn it makes.

Even if you get in at exactly the wrong time, with enough time behind you, it will all work out in the end.

The best time to buy stocks was 30 years ago. The second best time to buy stocks is today.

We will end with another quote by Edwin Lefevre

“Speculators buy the trend; investors are in for the long haul; “they are a different breed of cats.” One reason that people lose money today is that they have lost sight of this distinction; they profess to have the long term in mind and yet cannot resist following where the hot money has led.”