Very few among us remember what happened on this day in 1929. It was “Black Tuesday”, and the stock market dropped by 12% that day. The stock market’s slide had begun a few days earlier on October 24, but it accelerated until the “crash” on the 29th. The stock market would go on to lose 84% of its value over a three-year period.
My grandparents lived through it and, like virtually everyone alive at the time, the stock market crash of 1929 had a profound effect on them for the rest of their lives. The market collapse, which preceded the Great Depression, created an entire generation distrustful of investing. My grandparents never owned a stock, a bond, or a mutual fund. When they were able to save, they put their money in bank savings accounts that were guaranteed by the Federal Deposit Insurance Corporation (FDIC). The FDIC was created by Congress in 1933 in the aftermath of the market crash.
What have we learned over the nine decades since the crash?
First, complacency is dangerous. It’s important to remember that the stock market is a volatile place, and while the market goes up more than it goes down, sharp corrections are the rule and not the exception. We only need to look back about 10 years (October 2007 – March 2009) to find a time when investors were sent reeling by the stock market. The stock market dropped by 50% during the period now referred to as the Great Recession.
Second, we need to remember the fundamentals of long-term investing. By adhering to these proven, time-tested principles, we can dramatically improve our odds of success.
Diversification. Use funds (mutual funds and exchange-traded funds) rather than individual securities to achieve diversification across many asset classes.
Asset allocation. Own an appropriate mix of stocks, bonds, real estate and cash. Make sure that you take no more risk than is necessary for you to achieve your goals.
Rebalance. Periodically, and in a disciplined manner, bring your portfolio back to its target asset allocation, because over time it’s inevitable that it will drift away from the desired mix.
Tax-Efficient Asset Location. Put tax-efficient investments in your taxable (i.e. brokerage) account and tax-inefficient investments in your retirement accounts (e.g. IRA or 401(k)).
Control costs. Use low cost funds, trade sparingly and use low or no commission funds to build your portfolio.
Finally, hope for the best and prepare for the worst. Savvy investors know that the market is prone to severe corrections. We started our careers in the 1980s and many of you undoubtedly remember what happened on October 19th, 1987. On that Black Monday, the stock market crashed dropped precipitously – the loss was nearly 23% in a single day. Then, in the late 1990s and into the early 2000s, technology stocks crashed and the tech-heavy NASDAQ index declined by 78% from most recent high.
We have read several books about the history of market crashes over several hundred years, and they seem to happen about every 7-10 years. By that measure, we are overdue for a major market event. We are not predicting one. But we are suggesting you remain seated, buckled up and ready for heavy turbulence. It can strike without warning and it can rattle you deeply.
Finally, when (and not if) the market crashes again, keep your faith and remain sanguine. Market crashes are never permanent; recovery always follows. Investors only suffer actual losses if they lose their conviction and “bail out” in the midst of the storm.
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