08 February 2018
Against the backdrop of what can currently be described as a stock market ‘wobble’ this week, we took a look back at some of the most spectacular falls in recent history.
The occasional stock market crash is the price investors pay for the higher returns available from stock markets. You don’t get the highs without the lows. Unfortunately, it acts as a real deterrent for many people who – understandably - can’t bear to see the value of their hard-earned savings bounce around. The trajectory of previous market crashes may provide a little context and show that in most cases, if you wait it out, it’s worth it.
19th October, 1987 – ‘Black Monday’ saw the largest one-day fall in the Dow Jones Industrial Average in 30 years with the index dropping 508 points, 22.6% of its value. Plenty of investors panicked and sold out, but those who were patient were rewarded. While a £10,000 investment was reduced to £6,610 in a matter of weeks, by 1997 that investment had climbed to £32,690.
10th March, 2000 – the technology-heavy Nasdaq index peaked at 5,133, only to fall 78% in the following 30 months. The period preceding the slump had every characteristic of a full-blown market bubble. That said, today the Nasdaq sits at 7,116 and some of the companies caught up in the bubble, such as Amazon, have gone on to make their investors lots of money.
15th September, 2008 – Investors will still remember the savage sell-off in stock markets that followed Lehman Brothers filing for Chapter 11 bankruptcy protection. The bank collapsed under the weight of its debts, triggering a financial crisis that threatened the entire banking system. The FTSE 100 sunk 47%, though many of these losses were caused by the banks, which saw major falls. Those who bought at the very peak had to wait until May 2013 for the FTSE 100 to recoup its losses, but they would have kept receiving their dividends in most cases and would have seen gains since then.
6th May, 2010 – US stock market Flash Crash - The Dow Jones Industrial Average suffered its worst intra-day point loss, dropping nearly 1,000 points, before recovering almost all of its losses moments later. The crash – thought to have been caused by algorithmic trading (read: maverick traders mucking about with derivatives) – lasted just 36 minutes.
On Tuesday 6th February 2018 – the FTSE 100 has dropped 8% since the middle of January – from 7,779 to 7,141. On Wednesday it was already starting to climb higher again and at time of writing is now back at levels seen in September last year. In the ebb and flow of markets, it barely registers.
There is one exception to the “it will come back in the end” rule….Japan
In the late 1980s Japan experienced a so-called asset bubble that pushed its stock market and property prices up to astronomical levels. The inevitable slump lasted twenty years and turned into an enduring deflationary recession. On 29 December 1989, Japan’s Nikkei Stock Average finished the year at an all-time high of 38916. Today – after a period of recovery - it still only sits at 21610. The lesson? Don’t put all your eggs in one basket.
We all tend to have what we call a ‘home bias’ and buy more shares from our home country. Spreading your investment eggs around multiple global baskets is generally a sensible way to spread the risks around. If you’ve done that, with decent mainstream brands, you don’t fear the imminent end of capitalism, and you’re a long-term investor, the smartest way to react to wobbles, corrections and even crashes is to put your ear plugs in and consider the fact that the stock market is actually ‘On Sale’.