Lessons from the 1987 Stock Market Crash
Everyone remembers their first stock market crash.
Mine was October 19, 1987, when the Dow fell 508 points (22.6%) in one day.
This, of course, was before we all had computers on our desks (and in our pockets) to keep us up to date on what was happening. All we had were telephones—and unanswered questions about how some poorly understood computer-trading programs had allowed this to happen.
Happily, Cabot readers were prepared! The previous issue of Cabot Market Letter (our only advisory back then; the name has since been changed to Cabot Growth Investor) was titled, “Remain in Your Storm Cellar!” and advised that readers hold at least 50% of their accounts in cash.
Back then, the reasons for that cautious view were threefold. First, our interest rate-sensitive indicator had been telling us since April that rising interest rates were bad for the market (sound familiar?). Second, our new highs-new lows stock market indicator signaled growing selling pressures. And third, the market’s advance-decline line looked terrible.
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So our readers came through the ’87 stock market crash in far better shape than many investors. And less than a month later we were issuing a new buy signal, as conditions had improved on many fronts.
Since then, I’ve been through many corrections and crashes, and with every one, I think I’ve learned a little more. Every one is different, but overall, there are many similarities, and the following are my main thoughts on them. Hopefully these will help you navigate through our current stock market correction … or whatever you want to call it.
Crashes, Corrections and Bear Markets
1. Don’t get caught up in labels. Correction or crash or bear market, the only thing that matters to you is what happens in your own portfolio.
2. Don’t worry about what everyone else is worrying about; that’s already been discounted by the market. Right now, everyone is well aware of the “fact” that rising interest rates will be bad for the market.
3. Trouble tends to come from where it’s least expected. In 1987, it was the computer programs; now it’s the Fed – whose previous rate hikes over the past couple years had inspired little to no reaction from investors. Last week, the Federal Reserve’s vows to raise the rates several times later this year suddenly sparked market-wide panic. Go figure.
4. Just as a bouncing ball experiences progressively smaller fluctuations, so will the market generally experience progressively reduced volatility in the days after a high-volatility crash. Some high-risk investors and some inexperienced investors have been crippled—financially and/or psychologically from the recent carnage—and will disappear from the market for a very long time, leaving slightly wiser survivors to carry on.
5. But for a while longer—perhaps another week, maybe a few weeks—the actions of people selling losers will depress many stocks.
6. At some point, bargain hunters will take control.
7. At that point, anyone still worrying about the conditions that caused the latest troubles will be left behind by a new bull market.
8. The key to success, as always, lies not in predicting what will happen but in tuning out the noise, focusing on what matters (the action of key indicators and the action of your own stocks), and using a proven system of investing such as you’ll find in all 12 Cabot advisories.
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Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More