The World Didn’t End: 25 Years Later
This month, we “celebrate” the 25th anniversary of the largest single day decline in stock prices. Yes…celebrate! But why?
On October 19, 1987, market prices fell almost 25%. Yes, you read that correctly. 25%!
Imagine, at the end of one random day, a quarter of your equity holdings are gone.
How vividly can you recall that day? Do you remember the network news channels reporting it and how grim it was?
At the time, it seemed to most that it was the end of the world…or, at least, the end of our financial system as we knew it. Imagine today’s sensationalistic media outlets getting a hold of that day’s events!
Interestingly, however, something completely unexplainable has taken place since that infamous day. The world didn’t end and the financial system didn’t collapse.
Not only did it not collapse, but it has grown to unfathomable heights.
To be specific, on that dreaded day, the S&P 500 Index closed just under 225.
At the end of September, 2012, just shy of 25 years later, the S&P 500 closed at 1,441.
Do the math for a minute and you’ll discover that the value of the 500 largest companies in the United States increased six and a half times since then. And, this does not include dividends paid each year which averaged over 2% per year.
So, why are we drudging up the awful events of a single day 25 years ago? Well, as in all forms of adversity, there’s a lesson which will serve us better in the future.
As reported in Roger Lowenstein’s biography: Buffett: The Making of an American Capitalist, the value of Warren Buffett’s holdings in Berkshire Hathaway dropped $347 million on that one single day.
Not a very good day. Not even for Warren.
Given that fact, here’s an important trivia question for you: How much did Warren Buffett lose in the stock market on October 19, 1987?
Take a minute to think it over because your answer is very important to your future.
Okay, if your answer is that he obviously lost $347 million, you’re wrong. The correct answer is he didn’t lose anything because he did not panic and sell.
As we all did, Warren experienced a temporary decline in the value of his investments.
However, if all he did was receive index returns on his money since that day (which we know he earned a lot more), then his investment net worth would be six and a half times greater today. Six and a half times greater in 25 years!
Again, this doesn’t even include reinvested dividends. Let’s just assume that he spent them each year to live on!
How Can We Benefit From This?
So, what can we learn from drudging up this ugly day’s events 25 years ago?
- First, recognize that whatever is going on in any given day, while it may feel entirely unique based on the way it’s reported on the news, just as it did back on October 19, 1987, isn’t really that unique from an historical perspective. Chances are great that we’ve been through it before, and you’ve survived its impact.
- Second, the stock market has always been “volatile” and it will continue to be “volatile”. But, volatility is not the same as loss. I can’t overemphasize just how important that reality is. It’s simply a temporary change in price, and a reality imbedded in investing that all confident and successful retirees have to come to grips with. All major price declines have historically been temporary. Not some. All of them.
- Investing takes real discipline. It’s not good “timing” that is the key to investing. It’s the duration of time that you maintain ownership that matters. Resiliency is typically rewarded, as it was if you didn’t jump out back in October, 1987.
- You can’t even begin to think about owning investments at this “retirement stage” in your life before taking the time to carefully craft and develop a well thought out long term plan (Retirement Blueprint™) based on your own unique set of priorities and resources. Without it, any significant market volatility is likely to throw you into a tailspin and take you off of the disciplined path that is necessary for investment success at this stage in your life.
- Lastly, remain disciplined in spite of daily market movements. Once you’ve taken the preceding four steps, then your job is to “objectively” monitor your results and rebalance to your prescribed mix on a regular basis without emotion.
Let’s hope we don’t have to live through another day like October 19, 1987. But, if we do, this time around, you’ll be a lot better prepared if you follow these strategies and remember that “this time it’s NOT different”.