Shaken by the Dow’s Plummet? Take These 5 Lessons From the 1987 Stock Market Crash

Just as we started breathing in the wake of the Great Recession — and celebrating the steady upward climb of the stock market — a sharp drop came along to remind us of the risk, and reality, of investing. On Monday, the Dow shed 1,175 points, or about 4.6 percent. It was certainly stomach-curdling for anyone who has stocks, and there may be further downward jolts to come. But, for some perspective, let’s look at a far more cataclysmic event — 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,” that bleak autumn day saw the market record its largest one-day percentage drop ever: more than 22 percent.

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

When the market started its free fall, local TV stations where I lived at the time — Tucson, Arizona — 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 that caused the S&P 500 Index to lose about 50 percent of its value by March 2009.

Here are five key lessons from that terrible day that can help you prosper now and in the future:

1. Always be in

When the crash of 1987 occurred, I was all in — every dime of available cash that 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.

It was a dumb move, since the market recovered its losses less than two years later.

If you’re investing for the long term — which is 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. If you’re not “in,” 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 counterintuitive, 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. They offer an endless stream of 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 doo-doo will always hit the fan. 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 let the current market correction be a reminder of the risks and the rewards. Ask yourself two questions:

1. Do I have money I won’t need for at least five years? If the answer is “no,” find another way to invest, because 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 is 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 who insist the sky is falling and buy stocks.

What did you learn from the 1987 crash? How do you think the current volatility on Wall Street will shake out? Share your insights in comments below or on our Facebook page.

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