The "crash" of 1987
The Advocate, Wednesday October 4, 1995
I'm sure everyone knows about the stock market crash of 1929. But who remembers what happened Monday, October 19, 1987? I remember it well. I just got back from my holidays in Hawaii. I received a call from one of my clients the next day around noon expressing their deep concern in what was happening in New York with the DOW Industrial down over 200 points. I calmly told them not to worry, that it was only temporary and it would come back. I hadn't completely landed from my vacation and didn't realize the seriousness of what was happening that day. I casually wrote out the averages on the back of an envelope at the end of the trading day.
The TSE was 3272.5, down 362 points. The DOW Jones dropped even more dramatically - 509.9 to 1737.5 - down 22.69% in a single day.
The reality of that did not really sink into me until the next day when I started to receive calls from my clients asking what they should do. It was very difficult to calm them and reassure them it would come back. Unfortunately, some cashed out at the worst possible time because of fear spurred on by the media. This one day drop was approximately twice the magnitude of the one in October 28, 1929. Fortunately, since 1987 safeguards have been put in place to prevent that large of a drop in a single trading session.
September and October have traditionally not been kind to investors. A study was done to record the returns of investors who invested November of every year as opposed to those who invested September 1. Those who invested November were substantially higher than those who invested in September. I really can't explain why this phenomena occurs. All I know is that it does. I wonder if that is why they call this time of Autumn - Fall? What I have experienced since I started with Regal in 1983 seems to corroborate this scenario.
Some of my clients were scared of losing everything because of what they read shortly after the so-called crash of 1987. Unfortunately, they believed the media predicting another great depression. There were also some books written predicting the same outcome. I tried to explain that circumstances were different and it wouldn't happen again, but their minds were already made up and they wouldn't listen to me.
I even had the nerve tp suggest this would be a great time to invest more money, not cash out. Last Friday, Septembet 15, the DOW Jones reached another all-time high of 4797.57. This represents a rise of 3060.07 points since October 19, 1987 or 176% in less than 8 years. Hindsight is 20/20! Most people missed one of the best times to buy since I've been in the business. A few saw the wisdom in what I said and bought. Simply put, you buy when the prices are low - and they all had to agree with me, the prices were very low. Those who bought shortly after the crash are some of my best clients. They realized the incredible buying opportunity this represented and that the decline was only temporary. I explained, as I do to everyone who invests with me, they needed to have at least a 5 year time horizon. In the 5 years that followed they have more than doubled their money. They learned the secret of buying low - not what a lot of people do - buy high.
What about now? Are the prices high or low? January 6, 1995 the DOW was 3867.41. September 15, 1995 it was 4797.57 - a gain of 930.16 or 24%. I would say prices are rather high. That's not to say they won't go higher but I feel more comfortable when prices are lower before I invest any new money.
As I wrote in August of this year in my article "No Money to Invest?", dollar-cost-averaging would be the way to invest now. Whatever money you want to invest now, divide it by 12 and invest that amount every month for the next year. That will give you a safe way to average out your cost and not buy too high. Also, if the next correction comes (in October?) you can invest the rest when the prices are at their lowest. Remember, don't be scared out by the media's prediction of doom and gloom. Bite the bullet and buy low. If you have at least a five year time horizon you too may discover the secret and maybe double your money also.
By the way, I kept that envelope dated October 19, 1987 with the DOW's index of 1737.5 as a reminder to keep the faith and be a Long-Term Investor. See my March 2, 1994 article, "Long-Term Investing," or contact me for a copy.
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