The Black Monday Lessons

Good Morning Relaxing Retirement Subscriber,

Before we begin this week, I’d like to take you back exactly 31 years ago today.  I have a short video and some newspaper and magazine clippings for you to see.

Please click these links to view the coverage from that memorable day and then come back for the important lessons:


News Clippings: Click to view

Aside from the “dated” newscasts and newspaper covers, did these bring back any memories for you?

They sure did for me.

On that momentous day in October, 1987, the Dow Jones Industrial Average fell 22.6%, and the S&P 500 fell 20.5% in one day.

Yes, you read that correctly.  22.6% and 20.5% in one day!

To put a dollar value on that using nice round numbers, if the equity portion of your Retirement Bucket™ was valued at $2,000,000 on October 19, 1987, on the following morning, it was likely valued somewhere close to $1,548,000 assuming your holdings mirrored the Dow (unlikely, but useful for this discussion).

If evaluated in a vacuum without any historical perspective, it was not a very good day.

However, it was only a bad day if you reacted to it incorrectly!

Here’s why…

On October 19, 1987, the S&P 500 Index opened at 282.70 and closed at 224.84, a loss of 20.5% in one day!

Exactly one year and a day later, on October 20, 1988, the S&P 500 Index closed where it opened one year earlier, at 282.88!

One year!  That’s how long it took to rebound from the single greatest daily loss in stock market history.

What are the Lessons?

With new all-time market high announcements all over the news this year, it’s more critical than ever to rationally and unemotionally evaluate the facts before the next downturn occurs and the financial media stirs the pot again.

In an effort to capture your attention, you can count on them to treat the next one as “different this time”, “bigger and more damaging than ever before”, and “permanent”.

They have been wrong every time before, and it’s highly, highly likely they will be wrong again.

Despite what they want you to feel, the most important fact to ingrain in your mind is that market corrections and crashes are both normal and temporary.

Normal in that they occur all the time, i.e. 56 pullbacks of 5% or more since 1945, (not including the one in February this year, and the second one last week)

And, temporary in that they last far less than most realize, with 53 of the 56 recovering in 14 months or less (including Black Monday above), and 44 of those 53 recovering in 4 months or less.

This second point might be the most important if the following thought has ever entered your mind, “but Jack, I’m getting up there in age.  I understand what you’re saying about investing for the long term, but I don’t have time to make it back if we have another big correction like in 1987.”

My response to that statement is three-fold:

  1. First, as I outlined above, and used today’s Black Monday anniversary to highlight, all market corrections and crashes have been far more temporary than predicted.
  2. Second, here are the actuarial table facts on your longevity:
    • The average joint life expectancy of a 65 year old couple is 27.1 years, i.e. age 92.
    • The average joint life expectancy of a 70 year old couple is 22.6 years, i.e. age 93+.
    • The average joint life expectancy of an 80 year old couple is 14.5 years, i.e. age 94+.

      Translation: even if you are 80 years of age, you DO have time!

  1. Finally, from a strategy standpoint at this critical stage in your life where you are withdrawing from your Retirement Bucket™ to support your desired lifestyle, you don’t want to keep 100% of your Retirement Bucket™ tied to the daily volatility of equities.

    We recommend holding 5 years’ worth of your anticipated withdrawals outside of equities, i.e. if you need to withdraw $7,500 per month from your Retirement Bucket™, that’s $90,000 per year or $450,000 over five years you would hold in money markets and short-term fixed income instruments.  This is in addition to the dividends you receive which buys you even more time.  This allows you to invest the rest for the long term and capture long-term market returns with complete confidence that you will not have to sell during a temporary down market for needed cash flow.

As Vanguard founder John Bogle said in response to how he handles market crashes, “I get scared just like everybody else when market prices fall quickly.  But, then I go and read everything I’ve written over the years to set myself straight!”

It might not be a bad idea to keep this edition of The Retirement Coach Strategy of the Week close by to read the next time market prices fall and the financial media proclaims Armageddon again.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)