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Better Perspectives on Black Monday

Better Perspectives on Black Monday

October 22, 2017

Last week was the 30th anniversary of “Black Monday” for the stock market, a day in October 1987 when stocks declined by over 20%!  Knowing this, I read every article on the topic I could find looking for unique perspectives.  Instead, most articles and interviews were variations of the same theme: It was a traumatic experience, no one completely understands the cause of the plunge to this day, and it could happen again.

As far as narratives go, this is par for the course. I’m not opposed to using history to develop rational expectations for the future. In fact, that is the basis for much of our investment planning and counseling efforts on a long-term basis. Short-term returns are incredibly volatile and prone to surprises. I’m not for a minute downplaying the impact of seeing over 1/5 of your stock portfolio temporarily disappear in one day. But were there any other perspectives from the experience? If there were, I couldn’t find them.

How about these?

  1. Despite the significant decline in October, stocks finished 1987 with a gain. The S&P 500 Index returned +5.2% that year; the globally diversified DFA Equity Balanced Strategy Index returned +11.0%.  Stock prices were up approximately 40% before the crash and closed out the year with 6% to 7% gains in December.  Investors who were able to look past month-to-month returns were barely affected.
  2. Stocks had been on an incredible run in the seven years leading up to 1987, especially smaller and more value-oriented stocks and international shares. Including the 20% decline in October, the S&P 500 Index gained 16% a year from 1980-1987, the DFA Equity Balanced Strategy Index returned +20.7% annually. $1.00 grew to $3.28 and $4.51, respectively over this period -- about double their long-term averages.
  3. Even if you made a significant investment in stocks on the eve of the crash, you didn't have to wait long to see the losses erased.  The DFA Equity Balanced Strategy Index recovered the entire loss in just 12 months, and the S&P 500 was back in the black by April 1989.
  4. Returns since October 1987, while not rising to the level of the 1980s, have been very good. Let’s imagine someone had the worst imaginable (short-term) timing and invested $100,000 in the Vanguard S&P 500 Index on September 30th, 1987. How much would you guess they would have by September 30th, 2017? After a 9.4% per year return, it would have grown to $1,474,223! That same investment in the DFA US Micro Cap Fund rose to $2,131,550 thanks to a +10.7% annual return.
  5. Now imagine you retired on September 30th, 1987 with $100,000 and a balanced portfolio (40% S&P 500, 20% DFA US Micro Cap, 20% DFA One-Year Fixed Income, 20% DFA Short-Term Government Bond). You could have taken out 6% a year ($6,000) adjusted for inflation and still had a higher portfolio balance ($116,008) by 2017. This is a 50% higher withdrawal rate than the 4% a year often cited as “sustainable” by retirement studies. By 2017, your yearly withdrawal would have more than doubled to $12,596 due to rising inflation, and over the entire 30-year period, your cumulative withdrawals were $283,719—approximately three times your starting portfolio value! So much for “sequence of returns risk” — even starting your retirement at the worst possible time has worked out fabulously if you stuck with a diversified portfolio and didn’t panic after short-term disruptions.

So the lessons from Black Monday are not just that stocks can be incredibly volatile in the short run and lose more than anyone expects. But also that, in the long-run, stocks are amazingly resilient and have recovered from even the most traumatic events. Further, it’s not necessary to anticipate or even react to short-term market disruptions. That’s the whole point of having a robust investment plan — it should allow you to withstand panics and crashes and bear markets without compromising your ability to achieve your long-term goals, and give you the permission to tune out and ignore these unexpected but inevitable experiences.


Past performance is not a guarantee of future results. Index and mutual fund performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.