A Look Back on Black Monday: October 19, 1987

In Asset Allocation, General Financial Planning, Investments, Market Review, Personal Finance, Personal Financial Planning, Retirement Planning, The Economy by Chip Hymiller

It’s hard to believe that it’s been 30 years since “Black Monday,” the day the stock market declined a whopping 22.6%!

Although I was merely a sophomore in high school, I remember the day quite well.  Having my first real job and being a “saver” by nature, I had just become interested in investing.  I had recently invested in a CD (earning 6 7/8%!) and was interested in boosting my returns by investing in the stock market.  I was enamored with the fact that I could earn money simply by committing to not spend now.  Even at that time in my life, I was a master at delayed gratification!

Never one to jump into anything, I decided to learn about stocks so that I could confidently invest my “nest egg.”  I was encouraged by one of my teachers to pick a few stocks and track them over time to see what happened.  I remember looking through the stock quotes section of the newspaper and identifying a few companies and committed to following them.  I picked a handful of stocks, but I specifically remember tracking Coca Cola, a company I knew well as a teenager and Berkshire Hathaway.  I decided to follow Berkshire simply because it really stood out in the quotes section of the newspaper due to its unusually high per share price (in the neighborhood of $3,000/share at the time).  I also made it a point to watch Wall Street Week with Louis Rukeyser, which came on Friday nights on PBS – I didn’t have much of a social life.

Fast forward to the fall of 1987 – specifically October 19, 1987.  That was the day that I realized the meaning of investment risk.  The teacher who had encouraged me to learn about the stock market by tracking it over time, informed me that there had been a stock market “crash” in which nearly one-third of his money had simply evaporated.  Gone, in the blink of an eye due to no fault of his own.  Investing was risky and I had just realized it!

A Recap of Black Monday

What was going on in 1987 to cause such market uncertainty?  Well, there were a number of things.  Uncertainty in the Middle East.  Oil price volatility related to an OPEC collapse.  An economy that had expanded rapidly, but was now beginning to slow.  Increasing national budget deficits and an administration that seemed unwilling to curb spending. The combination of these and other factors were all weighing on investor’s minds.

Now, as I look back from an adviser’s perspective at what happened 30 years ago and try to put myself in the shoes of someone who retired in 1987, I realize how scared they must have been.  Here is a rundown of the timeline of what happened in the Dow Jones Industrial Average (currently at a level of nearly 23,000) during the course of 1987:

  • August 25, 1987: The Dow peaked at 2,722, which represented a 44% gain from the previous year’s closing of 1,895
  • October 14, 1987: The Dow dropped 3.8% (95 points) – a significant daily decline
  • October 15, 1987: The Dow fell another 2.4% (58 points) – representing a decline of 12% from the August high
  • October 16, 1987: The Dow declined by another 4.6% (108 points) – representing a 17.5% decline in less than two months
  • October 19, 1987: The Dow declined 22.6% (508 points), closing at 1,739. A decline of this magnitude today, would result in the Dow declining by about 5,200 points!
  • From August 25, 1987 through October 23, 1987 the Dow was down by about 36%.
What Now?

Stocks had declined by 36% in a two month period!!  What do you say to someone who has experienced this?  Someone who has recently retired? A person who is depending on their portfolio to cover living expenses?  How do you respond?  What actions should you take?  Here are the calming words of wisdom that Louis Rukeyser imparted to his loyal viewers, including me (who had never invested a dime in the stock market) back in 1987.

For those of you who may be interested in seeing the remainder of the October 23, 1987 episode of Wall Street Week with Louis Rukeyser, you can find the other two shows, by clicking the following links:

After the “Crash” What Happened Next?

Of course, we all know what ultimately happened.  Even those who invested at the peak of the market in 1987 were ultimately rewarded for the risk they assumed.  The stock market fully recouped losses in about 18 months.  Most importantly, the Dow Jones Industrial Index has appreciated from about 2,700 in 1987 to 29,200 today.  That’s a return of about 8.25% annualized (not including dividends), or a cumulative return of about 981%!  Here are the cumulative returns of an all stock portfolio for the months and years after Black Monday:

  • After 1 month:  -8.2%
  • After 6 months: +5.5%
  • After 1 year:  +14.85%
  • After 3 years: +34.3%
  • After 5 years: +97.1%
What about Coca Cola and Berkshire Hathaway?

Unfortunately, I never invested in Coca Cola or Berkshire Hathaway.  The thought of my money declining, literally overnight, was something I simply could not accept.  I decided that too much could go wrong, there was too much uncertainty and too many variables that were unpredictable – investing in stocks was just too risky.

Since 1987, Coca Cola’s stock price has appreciated by more than 1,400% excluding dividends.  And Berkshire Hathaway?  The “expensive” stock that required about $3,000 to buy one share in 1987?  Well, it’s still expensive – one share now costs $282,000!

In retrospect I realize that I made a huge mistake 30 years ago.  My mistake did not involve investing in a stock that declined by 30% overnight.  The real mistake I made was allowing the unknown of the short term impact my long term investment decisions.  I learned a valuable lesson in 1987 and I’m glad I did!