01A Chart of 1987's Black Monday
A 23% loss in investment value in a single day is drastic. New, inexperienced investors sold their stock market holdings and bailed out of the stock market, many never to return.
Yet those who understand how the stock markets work did not experience a 23% loss. Experienced investors know that bear markets, such as Black Monday, will occur every few years in the stock market.
Experienced investors with a long-term view chose to stay invested, despite the fear and uncertainty that Black Monday caused. How did that choice work out for them? The graphs on the next few pages will show you how they fared.
021987's Black Monday Viewed Over the Full Year
The chart above shows you Black Monday, which occurred on October 19, 1987, in the context of the entire 1987 year.
The stock market had a .26% return that year, barely in positive territory.
Some Investors Did Not Lose a Penny throughout Black Monday
You can see on the chart above that the stock market went up steadily, dropped drastically on Black Monday, and then began to climb back from its low point before the year was over. This means if you invested on the first trading day of the year, January 2, and remained invested throughout Black Monday all the way to December 31, you did not lose a single penny.
Some Investors Panicked and Lost Money on Black Monday
If you invested just prior to Black Monday, on October 1, 1987, by year end your investments were down 17%. If you panicked just after Black Monday and bailed out of the stock market, you locked in your losses and missed the following market recovery.
Some Investors Recognized the Opportunity in Black Monday
Smart investors, who invest the way they shop, waiting for great sales and discounts, recognized the opportunity to invest at a discount and bought stocks just after Black Monday, realizing very attractive returns as the market recovered over the subsequent years.
If you bailed out of the stock market in 1987, you missed the next few great years. As you’ll see on the next page, those who stayed invested watched their accounts steadily grow in value.
03A 10 Year View Of The Black Monday Bear Market
On the graph above, you can see Black Monday shown between the two red arrow sections. It looks rather insignificant when viewed in context of an entire ten years.
If you invested just before Black Monday, watched your funds go down, but chose to remain invested and ride it out, by the end of 1996, your investments would have grown at an 8.5% annualized return. This means for every $1,000 you invested, it would have grown to $2,260 over ten years.
If you were a bit luckier and invested just after Black Monday (buying low), you realized an 11.6% annualized return. At 11.6%, for every $1,000 you invested, it would have grown to $2,996 over ten years.
As a long term investor, you were able to earn a respectable rate of return over ten years regardless of whether you invested at a short-term market high, or a bear market low. The only investors who experienced significant losses were those who bought high, panicked, and sold during the bear market.
Black Monday had little effect on investor's long-term stock market returns unless they panicked. Financial advisors encourage a buy and hold perspective because they know average investors earn below average returns by buying high and selling low.
Once the market has dropped, the most likely way for your investments to recover their value is to stay invested. That is because those who sell typically wait on the sidelines far too long, until the market goes up, then buy back in, thus missing out on much of the gains that occur when the stock market recovers from a bear market.
In the next few charts, we’ll examine another trying time for investors: the bear market of 2002.
04A Chart Of The Bear Market of 2002
Investors who panic think they should flee to safe investments, and wait for things to get better. What they end up doing is selling at market lows, and waiting until the market goes back up, then buying back in at higher prices. It makes no sense.
Emotional decisions are rarely rational. Study stock market history so you react appropriately to market ups and downs.
The investors in 2002 who didn't understand that you must stay invested to achieve attractive stock market returns missed out on all, or a part, of the subsequent market recovery, as you'll see in the next two graphs.
05The 2002 Bear Market Viewed After a Year
The bear market of 2002 bottomed on 10/9/2002. The stock market then began to recover, gaining 15% in the subsequent 1 month period.
Despite a bad start, from July 2002 to year end 2003, the market gave you a 9.6% return, if you stayed invested.
However, if you were like the average investor, you did not put your money back in the market until things had already started to recover, and you missed out on much of the market rebound, possibly cutting your return in half.
When the market goes down, irrational decisions stem from thoughts that the market will continue to go down, until you are left with nothing. If you are invested in index mutual funds, every publicly traded company in America would have to go out of business at once for your fund value to go to zero.
If you own a diversified portfolio of index funds, you will weather bear markets well by just leaving your portfolio alone. If you own individual stocks your downside risk could be much greater as an individual stock can easily become worthless.
On the next page, we'll look at the last chart in this series, which shows how the July 2002 bear market looks in context of the next five years.
06A Chart Of The Bear Market of 2002 Over 5 Years
The bear market of 2002 bottomed on 10/9/2002. The stock market then gained 101% over the subsequent 5-year period, peaking on 10/09/07.
You can see the start of this bear market on the chart above, between the red arrows. If you remained invested, from July 2002 through year end 2007, you earned an 8% annualized return. The Rule of 72 tells you that at an 8% return, your money will double every 9 years.
The value of equities matters at the time you need to sell them and use them for their intended purpose: future income, not current
People who sell after the market has dropped wait until the market has gone back up to buy back in, thus ensuring they earn below average returns.
The time to sell equities is after the stock market has had a year of above average returns. If the stock market had a return of 15% of more, consider taking gains and investing them in safer investments.
If the stock market has dropped 15% of more, remain invested, and wait for a better year.
Some readers will point out that if you had stayed invested through 2008, the returns above would have been wiped out. True.
I am not saying you should blindly invest and never make changes. I am saying the time to sell is in "up" years. If you had actively taken gains after great years in the market, a process called rebalancing, then the bear market of 2008 would not have had such a devastating effect.
For more perspective, see a table of historical stock market returns, which shows year by year returns of the S&P 500 Index from 1973 to today.
07Graph of the 2008-2009 Market Crash in the Short Term
From Sept. 1, 2008 through March 9, 2009, the S&P 500 went down just over 53%. The majority of this decline occurred from Sept. 19, 2008 to March 9, 2009, which is what is shown between the two red arrows on the graph. The market was down 46% during that time period.
It is never pleasant when markets drop, but it is to be expected. If you stay invested, these declines have little impact on your long term results. From the bottom in March 2009 to October 30th, 2009, the market had gone up 53%. In the graph, you can see that didn't get you back to break-even, but it sure was a better result than if you had bailed out at the bottom and missed the ride back up.
Market drops look dramatic in the short term. Click on the next graph to see how this one looks when viewed over a full two years.
08Graph of the Rapid Stock Market Recovery After the 2008-2009 Market Crash
From the 3/9/2009 bottom to 3/8/2011, two years later, the S&P 500 had one up 95%. Most who went to cash near the bottom sat on the sidelines and missed this dramatic recovery.
Those who stopped contributing to their retirement plans during 2008 and 2009 out of fear missed out on buying shares at rock bottom prices.
The market recovery continued and on the next graph, you can see the outcome through all the way through year-end 2014.
09Graph of Results from 2009 Market Bottom Through Year-End 2014
By the time the end of 2014 rolled around, the S&P 500 had gone up over 200% from it's previous March 9, 2009 bottom.
As usual, in 2014 many investors started feeling "comfortable" investing in the market again. This makes no sense. The best returns come from investing in risky times.
If you're already invested, the worst results come from bailing out at the bottom. If it is money you need right away, it should not be in the market.
If you are thinking about cashing in after a downturn, click back through these graphs, and give some thought to the recovery you will miss out on. The record for coming out of downturns has been 100%.
Black Monday and the Bear Market of 2002
On October 19th, 1987, known as Black Monday, the stock market went down 23% in a single day. You can see this sudden decline in the graph above where Black Monday is shown from red arrow to red arrow. A stock market drop like this, called a bear market, looks drastic when viewed in isolation.