5 Lessons From the Stock Market Crash of 1987

While we’re still living through the aftermath of what’s become known as the Great Recession, we recently celebrated the 25th anniversary of something even more cataclysmic: the stock market crash of Oct. 19, 1987. It’s a day that changed my life forever, both professionally and as an investor.

Known as “Black Monday,” it’s the day the market had its largest one-day percentage drop ever: more than 22 percent.

At the time, I was a stock broker for EF Hutton, a well-respected company that ceased to exist not long after the crash. Watching the market meltdown that day was like watching a hurricane: terrifying, but at the same time, awesome in its power.

I visited the New York Stock Exchange on Oct. 19 of this year to file the following report. Check it out, then read on for more.

What I didn’t mention in that video is how that day in 1987 changed my professional life.

When the market started melting down, local TV stations where I lived at the time – Tucson, Ariz. – sent reporters to my EF Hutton office for interviews. For reasons I no longer remember, I was chosen to represent the company and explain what was going on. Over the course of a week, I was interviewed several times, both in the office and in-studio. Shortly thereafter, the local ABC affiliate offered me a gig on the morning news to talk about investing. About three years later, I quit my career as an investment adviser and founded Money Talks News.

So when I say the Crash of 1987 changed my life, I’m not exaggerating.

In addition to switching careers, however, the crash taught me important lessons – lessons that benefited me as an investor in subsequent difficult times, like the meltdown in 2008-2009. It could also benefit you going forward. Here’s a recap…

1. Always be in

When the crash of 1987 occurred, I was all in – every dime of available cash I had was in stocks. After the crash, I sold everything and was all out. Because I was both afraid and disillusioned, I stayed on the sidelines: a dumb move, since the market recovered its losses less than two years later.

If you’re investing for the long-term (the only sensible way to invest), you should always have some money in the market. Why? Because when you least expect it, the market will rise and you’ll lose an opportunity.

2. Always be out

The lesson above suggests that no matter how bad the market looks you should always be in. But the opposite is also true: No matter how good it looks, you should also keep some powder dry. Because often, when the market looks like it can’t go down, it’s just about to.

Think of it this way: If everything looks rosy, everybody’s in the market. If everybody’s all in, there are no buyers left to push prices higher. Result? Stocks fall. So while it may seem counter-intuitive, you should always have some money on the sidelines to take advantage of opportunities like market sell-offs.

3. Don’t lose your head

The most difficult lesson to learn as an investor is that while markets certainly seem rational, they aren’t. The reason is simple: Markets are influenced by people, and people operate on greed and fear much more often than they operate on logic.

This offers opportunity for those who can turn off CNBC, ignore the short term, and take the 30,000-foot view. Keep your head. Stay calm. Think it through. A cool head will allow you to see long-term gain when others can only focus on short-term pain.

4. Ignore the noise

The background of the market is noisy. “Experts” pretending they know the short- and long-term direction of the economy and the stock market fill the airwaves 24/7 with prognostications about something they can’t possibly know: the future. They’re not on the air to help you – they’re there to line their own pockets by pushing either themselves or a position in the market that will benefit them.

You should listen to informed opinions, but before investing you should always have your own. Listen, then decide: Let the firmness of your convictions determine your financial commitment.

5. Ask yourself two questions

If past is prologue, sooner or later, the poop will always hit the propeller. It happened in 1987, it happened with the Dot-com Bubble of 1997-2000, and it happened with the Financial Crisis of 2007-2008. The question isn’t if it’s going to happen again, it’s when.

So the next time a crash occurs, ask yourself two questions:

1. Do I have money I won’t need for at least five years? If the answer is “no,” then find another way to invest – stocks may be too risky. But if the answer is “yes,” ask yourself…

2. Will things one day return to normal? In other words, is the world unraveling temporarily or permanently? If the world’s unraveling permanently, buy canned goods and guns. But if you think that eventually the problem du jour will be solved – something that’s so far happened since the dawn of man – ignore those insisting the sky is falling and buy stocks.

(Lest you think I’m one of those willing to talk, but unwilling to put their money where their mouth is, you can see what stocks I own and when I bought them: Take a look at my portfolio here.)

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