This past weekend marked the 32nd anniversary of Black Monday. On Oct. 19, 1987, the Dow Jones Industrial Average suffered its biggest one-day loss in percentage terms, dropping 22.6 per cent.
In 1987, that was a 508-point drop. If the same percentage decline happened now the Dow would lose 6,050 points in a single session. Of course, it won’t, because stock exchanges have since built in “circuit breakers” that halt trading if one-day losses exceed a certain percentage level. But those didn’t exist in 1987, and investors were left stunned.
Obviously, this is not an anniversary anyone wants to celebrate. “Record drop” are words no investor wants to hear, but we need to remember that these events happen periodically and to be prepared when they do. History shows us that any decline will be temporary, but the length of time it takes to recover can sometimes be years.
So, what can you do to protect yourself from another 1987-type shock? Here are some suggestions:
Don’t panic. The worst investment decisions are made at times of high emotional stress. I know, it’s hard to stay cool when the financial world seems to be splintering, but you need to keep your head. If you own good securities, they’ll eventually recover. People who rushed to sell after the 1987 market collapse regretted it later as prices rallied. And look at what happened when the financial crisis of 2008-09 bottomed out in March, 2009. We embarked on the longest bull market in history, one that continues to this day.
Ensure time is on your side. Young people have time to ride out these storms. Older folks don’t. If you’re 65 or older, consider reducing your exposure to the stock market. Bonds and cash don’t provide much of a return, but they’ll provide a valuable cushion if the market melts down.
Diversify. Don’t put all your money in a few stocks. Spread your assets among a number of securities in different sectors. The same applies with the geography of your portfolio. Canada is a small market in global terms, and one that usually underperforms our U.S. neighbour.
Don’t speculate. If anyone starts talking about the next hot stock, walk away. If you get an e-mail touting a guaranteed money-winner, delete it. When I was young, I had a broker who would call me each month with the opening line: “Have I got one for you!” He made his commission. I lost a bundle before I wised up.
Buy low-risk stocks. A falling tide lowers all boats, but some more than others. Stable, dividend-paying businesses fare best in a crash. That includes utilities, telecom companies, banks and real estate trusts.
Remember, there will always be stock market shocks, sometimes at unexpected times. But if you invest with care and keep calm, you’ll survive and prosper.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.