October 19, 1987 was one of the worst days on Wall Street as the Dow Jones Industrial Average fell 508 points or 22.6%. The Friday before Black Monday was a shocker as well with the Dow falling 109 points or 4.6%. In two days, the Dow Jones lost nearly a third of its valuation.
The Dow Jones is currently enjoying an eight-year bull market run since hitting a low in March of 2009. The stock market has done so well that some people are drawing comparisons to the 1987 stock market.[1] Prior to the stock market correction in 1987, the Dow Jones was enjoying a nice, peaceful rise with hardly a sign of volatility. The 2017 version is following a similar pattern.
The October 19, 1987 drop was severe and dramatic but most people have ignored the rest of that calendar year. The Dow Jones Industrial Average finished 1987 with a gain of 4.7% and a $100,000 investment on January 1, 1987 is now worth $1.95 million, generating an average annual return of 10.2%! By comparison, the long-term U.S. Government bond lost 2.7% in 1987.[2]
The thirty-year anniversary of Black Monday is approaching and this will draw more comparisons to our current market. What should you do if we experience another Black Monday?
Rule 1: Do not sell! Selling your stocks during a market route may cause long term damage to your portfolio. In addition, if you sell on a day like Black Monday, you’re going to get horrible prices for your holdings because professional traders know you’re acting on fear and not on logic. If you sell, when do you buy again? From 1970 to 2015, the stock generated an average annual return of 10.27% but if you missed the twenty-five best days during this time frame your returned dropped to 6.87%.[3]
Rule 2: Buy! If investors are selling, you should be buying. You’ll be able to purchase great companies at reduced prices. For example, McDonald’s (MCD) closed at a low of $2.66 on October 19, 1987 and today it’s trading for $157.[4]
Rule 3: Do Nothing! During a severe correction, it pays to stay the course and let the dust settle before you decide to sell your investment holdings. A few days removed from a correction will give you a better idea of how to proceed with your portfolio. From the market low of October 19, 1987 until December 31, 1987, the Dow Jones increased 13%.[5]
Rule 4: Review. Use the correction and downturn as an opportunity to review your financial plan and financial goals. Are you still on track to achieve your goals or do you need to adjust your plan because of the correction?
Rule 5: Go on vacation! Peter Lynch, the legendary mutual fund manager of the Fidelity Magellan Fund, was on vacation in Ireland[6] with his family on Black Monday. If one of the best money managers in the world can go on vacation during a market rout, you can too! A $100,000 investment in the Fidelity Magellan Fund (FMAGX) on October 19, 1987 is now worth $1.7 million![7]
Are we on the verge of another Black Monday? Who knows. Don’t fixate on what may happen but instead focus on your financial goals and let the long-term performance of the stock market help you succeed financially.
But if we hope for what we do not see, we wait for it with patience. ~ Romans 8:25
Bill Parrott is the President and CEO of Parrott Wealth Management. For more information on financial planning and investment management, please visit www.parrottwealth.com.
Note: Your returns may vary from those listed in this blog and may be higher or lower than those posted.
[1] http://www.cbsnews.com/news/wall-streets-2017-is-starting-to-echo-1987/, by Anthony Mirhaydari, 2/24/2017
[2] Morningstar Office Hypothetical Tool, 10/19/1987 to 7/31/2017.
[3] Dimensional Fund Advisors Investment Principles
[4] Yahoo! Finance: McDonald’s Historical Price from 10/19/1987.
[5] Yahoo! Finance: Dow Jones Historical Prices from 10/19/1987 to 12/31/2017.
[6] One Up on Wall Street, Peter Lynch, page 9.
[7] Morningstar Office Hypothetical Tool, 10/19/1987 to 7/31/2017.