Black Monday thirty years on

Black Monday is still etched on the collective consciousness of the investment industry, a reminder of the caprices of markets and how quickly they can turn. This volatility remains a key deterrent for investors, and a reason why many are woefully under-exposed to the stock market.

The losses seen on Black Monday remain the largest single intra-day falls of the last thirty years It has helped teach investors a few salutary lessons: the importance of diversification, regular savings and the need to stay invested It should be a reminder to be a little cautious when things are going well The losses seen on 19 October 1987 remain the biggest daily falls in the level of the S&P 500 and FTSE 100 over the last 30 years. The S&P 500 index plunged 20.5% and the FTSE 100 dropped 10.8% in a single day. The losses seen in the wake of the Lehmans bankruptcy come close, with declines of around 9% in October 2008.

Nevertheless, Black Monday should remind us of some investment truisms. The first is that when it works, diversification is really effective. Data from Seven Investment Management, shows that while the FTSE 100 and S&P 500 were down 33% and 28% respectively in October and November 1987, gold was up 8%. Justin Urquhart Stewart, co-founder and head of corporate development said: “A well designed portfolio, like a well-made yacht, can help ride out the storms and sail through troubles to the calmer seas beyond.

It should remind investors to be a little bit cautious when things are going very well. Black Monday came after a lengthy period of sustained stock market gains, with stock markets growing at a pace of up to 30% per year in the preceding five years. Valuations were at record highs.

It also shows that it pays to wait out a crash. Figures from Hargreaves Lansdown show that in 1987 a £10,000 investment was reduced to £6,610 in a matter of weeks, but by 1997 that investment would be worth £32,690, and today it would be worth £104,340.

Finally, of course, it is the best argument for regular savings. It demonstrates the destructive forces of fear and greed and how they combine to create volatility. Investors have a few weapons to deal with this and regular savings is one.

The anniversary has prompted talk of whether the circumstances are ripe for another ‘Black Monday’ and there are some similarities: valuations are high and the bull run has been in place for some time. However, there is a notable lack of complacency. This has been a distinctly unpopular bull market and for that reason alone, the next Black Monday may be some way off.