Friday was the 30th Anniversary of the Wall Street’s Black Monday Crash on October 19, 1987. I remember sitting in college that afternoon and my friend telling me he heard on the radio that the Dow Jones had dropped over 500 points that day (508, to be exact). I was incredulous that the market could drop that much in one day (-22.5%) and imagined that he had just heard it wrong. I was a business major, but a drop that significant really shook the markets and the Dow Jones finished the month down -45% in all.
This got me thinking, what would we do if the stock market suddenly fell 22.5% TODAY? With the Dow Jones sitting at 23,328 this morning, that would be like it dropping a shocking 5,249 points by close. Would I immediately dust off my resume and start a job hunt? Or, would we be cool enough to weather the storm?
Some of the same factors that triggered that sell off seem to exist today: the market had grown substantially the 18 months leading up to the crash (Trump bump?), much of the trading was done by computer (although ‘circuit breakers’ have been put in place, and there were a number of geopolitical events happening (Middle East? North Korea?).
In the months following Black Monday, the market gradually caught back up to its previous high. It took about 15 months for that to happen. We carry about three years of spending in cash, so we could weather a storm like this – or the 2008 crash which was less sudden, but equally deep. Three years spending seems like a lot – but it’s good insurance. That said, some of our wealth is in stock options, so we definitely would take a haircut on those shares – since they have a fixed window in which they need to be exercised.
We would also likely opt to cut back sharply on spending. Much of our spending is discretionary, so it would make sense to introduce an austerity program until we saw some market recovery. That wouldn’t be fun, but it would keep us from going back to work for quite a while.
Sorry to start the week on such a down note, but the anniversary of Black Monday should be a reminder of the unpredictability of the markets. Next year will be the 10th anniversary of the 2008 crash that led us into the Great Recession. That will also be another reminder not to get too aggressive in equities investing. Given the slow recovery that happened with that downturn, everyone should have a plan for what they would do in these kinds of situations.
Image Credit: Pixabay; Chart from MarketWatch
MrFireStation 
Blue Mondays mean panic for most folks. For a few, they mean Green Tuesday. Through brutal personal experiences in 1987 and tech bust of 2000, I learned patience that comes with valuing diversification and persistence. Like you, I keep cash funds for lengthy downturns. When everyone runs for the doors, I look for valuables abandoned. In 2009, I found many. Cash works for that too!
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I’ve never kept enough cash out of the market to take advantage of a panic or sudden downturn. We have 3 years spending in cash – which seems like a lot. – but I don’t think I’d be brave enough to invest some of it in a panic.
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I was still working in 2009, so I knew I’d have time to recover if the entire economy melted down even worse. The opportunity to buy investment vehicles that had strong futures at a market low was very attractive. I’m still enjoying the very profitable gains. In the end, it’s not about bravery for me. It’s recognizing opportunity despite all the market noise of panic, as long as the opportunity is affordable and serves my long term goals.
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Working at a food company – whose stock price was up in 2008 as the rest of the market was -40% – we upgraded our house. Since real estate was down, we thought it a good inflection point. That said, the luxury home market continued to decline, so we are probably break even at best on our investment.
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Honestly, I think I would be sick to my stomach if that happens today. That being said, I would not sell (would be too late anyways). But I would likely deploy some of the cash we have laying around for our next Real Estate adventure. The latter would than be put on hold obviously 🙂
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Yes – I would definitely be sick to my stomach if that happened. I suppose it will happen at some point, so we should prepare for it.
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It’s an emotional rollercoaster alright but I hope in such times I stay mindful of the Buffett hamburger philosophy:
“I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”
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A lot of truth there!
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