10 investment lessons from ‘Black Monday’

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Black Monday, 19 October 1987, was when stock markets around the world saw their largest one day falls in history.

The Dow Jones Industrial Average dropped 22% and the Australian All Ordinaries Index plunged 25% that day.
With the 25th anniversary of the Black Monday stock market crash approaching, Fidelity highlights lessons that planners and investors can draw from the event.

Lessons of the 1987 crash are clear – don’t panic. “There is little danger of history repeating itself on the 25th anniversary of the 1987 stock market crash, says Tom Stevenson, Investment Director at Fidelity Worldwide Investment.

“Recalling the run-up to Black Monday, I’m struck by the different world we inhabited a generation ago. Amid today’s market woes, it is hard to remember the mood of confidence in the first half of 1987. Investment, in particular new issues, was all the rage. New company floatations were oversubscribed and shares opened at more than double launch prices.

“The sudden turn-around in sentiment saw Wall Street suffer its worst fall and parallels were drawn with the Great Crash of 1929. Looking back on the 1987 crash today, anyone who wasn’t there might wonder what all the fuss was about.”

Mr Stevenson says: “The lessons remain as relevant today as they were 25 years ago.

“If you invest steadily and regularly, you will find yourself obliged to buy into the market precisely when the opportunity is greatest but your mind is telling you to do the opposite.

“Reinvesting dividends as part of a “buy and hold” strategy can make even the most volatile of markets look like a steadily-rising elevator in the long run.”

Lessons that planners and investors can from the event include:

  1. Look through the market gyrations to what is happening in the real world. The 1987 crash was triggered by over-exuberance (the market had risen by nearly 40% in the first nine months of 1987) and was then compounded by automated computer trading. The underlying economy was sound at the time – hence the quick recovery.
  2. Invest regularly, a little at a time. This way, you will take advantage of market falls like the 1987 crash, picking up a few shares or units in a fund when they are cheap – even though your mind is telling you to put your money under the mattress.
  3. Re-invest your dividends. Use compounding – put dividend income back to work in the market.
  4. Keep calm – markets ended 1987 higher than they started and within two years had surpassed pre-crash peaks.
  5. Take a long-term view. The 1987 crash looks insignificant on a long-term chart today even though, at the time, it felt like the end of the world.
  6. Don’t put all your eggs in one basket. I was in Hong Kong at the time of the 1987 crash – the market there shut for a week, emphasising the point that emerging markets can sometimes be markets from which it is difficult to emerge in an emergency.
  7. Don’t try to time the market. When your emotions are running high you may not make the best investment decisions.
  8. Keep some of your powder dry. Crashes happen, and when they do you want to have some ammunition ready to take advantage. It may be frustrating to have even a small proportion of your savings earning next to nothing in cash when shares are rising, but so too is being unable to capitalise on bargain basement prices when they appear.
  9. Beware of buying high and selling low. Remember that the stock market is the only market in the world in which we prefer to buy when prices are high and are put off by low prices. Think about how you would buy fruit and veg at a street market. You would behave in exactly the opposite way.
  10. Watch costs, but worry more about value. The difference between the charges on an actively-managed fund and a tracker might be 1% a year. If you back the right manager, however, that might be the best 1% you ever invested.
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. ©  2012 FIL Responsible Entity (Australia) Limited.  Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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