Did we learn enough from 1987 market crash?

Jill on Money

“While the waters seem calm, vulnerabilities are building under the surface (and) if left unattended, these could derail the global recovery.”

The International Monetary Fund recently issued this caveat to its upgraded global growth projections. It went on to say that the economic bounce back was breeding “complacency,” which was “spawning financial excesses.”

These words could have been the same warning from 10 years ago — or 30.

This month we marked the 30th anniversary of the crash of 1987, aka Black Monday, which occurred on Oct. 19, 1987. That day, the Dow Jones Industrial Average cratered by 508 points or 22.6 percent, making it the worst one-day percentage loss Wall Street has ever suffered — the next closest was a 12.8 percent loss in 1929.

Sadly, the magnitude of the 1987 crash was soon forgotten, according to author Diana Henriques. In her latest book, “A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History,” Henriques explained how Black Monday “was the product of profound but poorly understood changes in the shape of the marketplace over the previous decade.”

There were missed opportunities, market delusions and destructive actions that stretched from the silver crisis of 1980 to regulatory turf battles in Washington, and even a bitter rivalry between the New York Stock Exchange and the Chicago Mercantile Exchange.

The upshot was a crash that might have been prevented and a financial crisis that was only stopped because of the Herculean effort of a few key players of the time.

Sound familiar? You would think that, after Black Monday, lessons would be learned on every level, in government regulatory oversight; on Wall Street, where opaque and misunderstood financial products purchased with borrowed money can spark a contagion; and by retail investors, whose emotions allow them to get swept up into bull markets.

But in her analysis, Henriques demonstrates how Black Monday was the precursor to the financial crisis of 2008. Investors, regulators and bankers failed to learn from the pain of 1987, even as the same patterns resurfaced.

And today, the regulatory system remains Balkanized, and all of the “major mutations that were central elements of the Black Monday crisis have been more deeply embedded in Wall Street’s genetic code.”

Henriques also notes something that we all know about ourselves: We don’t cope particularly well in a crisis. Most of us panic. How do we avoid making the mistakes that panic causes? It is nearly impossible to predict a crash, so it would be wise to keep the following aphorisms in mind:

Cash is king: An ample emergency reserve fund of six to 12 months’ worth of living expenses can go a long way in calming nerves and reducing the urge to sell at the bottom. For those near or already in retirement, a cushion of one to two years is advisable.

Planning is queen: A thorough financial plan that contemplates both good and bad markets can help you navigate a crash and its aftermath. Returning to the plan in times of volatility can help remind you of your long-term goals.

Diversification and rebalancing complete the royal family: Understanding your risk tolerance to build a diversified asset allocation for your investments, followed by periodic rebalancing, can help protect your money when the next crash occurs.

Contact Jill Schlesinger, senior business analyst for CBS News, at askjill@JillonMoney.com.

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