What is 'Black Monday'
Black Monday refers to Oct. 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning of a global stock market decline, making Black Monday one of the most notorious days in financial history. By the end of the month, most of the major exchanges had dropped more than 20%.
BREAKING DOWN 'Black Monday'The cause of the massive drop cannot be attributed to any single news event because no major news event was released on the weekend preceding the crash. While there are many theories that attempt to explain why the crash happened, most agree that mass panic caused the crash to escalate.
It Can Happen Again
Since Black Monday, a number of protective mechanisms have been built into the market to prevent panic selling, such as trading curbs and circuit breakers. However, high-frequency trading (HFT) algorithms driven by super computers move massive volume in just milliseconds, which increases volatility. The Flash Crash of 2010 was the result of HFT gone awry, sending the stock market down 10% in a matter of minutes. This led to tighter price bands being installed, but the stock market has experienced several volatile moments since 2010. The rise of technology and online trading have introduced more risk into the market.
Lessons of Black Monday and Other Market Crashes
Unless it is absolutely the end of the world, a market crash of any duration is temporary. Many of the steepest market rallies have occurred immediately following a sudden crash. The steep market declines in August 2015 and January 2016 were both 10% drops, but the market fully recovered and rallied in new or near new highs in the months following.
Stick With Your Strategy: A well-conceived, long-term investment strategy based on personal investment objectives should provide the confidence needed to stay cool while everyone else is panicking. Investors who lack a strategy tend to let their emotions guide their decision-making. Investors who have stayed invested in the Standard & Poor’s 500 Index since 1987 have earned an annualized return of 10.13%.
Buy on Fear: Knowing that market crashes are only temporary, it should be viewed as a moment of opportunity to buy stocks or funds. Market crashes are inevitable; have a shopping list prepared of stocks or funds that would be more attractive at lower prices, and buy while others are selling.
Turn Off the Noise: Over the long term, market crashes such as Black Monday show up as a small blip on the performance of a well-structured portfolio. Short-term market events are impossible to predict, and they are soon forgotten. Long-term investors are better off turning off the noise of the media and the herd, and focusing on their long-term objectives.