This week marks the 25th anniversary of Black Monday.
As I was reading the financial news, I came across this quote uttered by Lee Iacocca in October 1987:
The borrowing has to stop. The market slide was a shot right between the eyes that had better wake us all up to the simple fact that we can’t keep romping forever on borrowed money.
Here we are more than two decades later, and Iacocca’s words are as relevant as ever.
Back in the fall of 1987, economic concerns over a weakening dollar and rising interest rates were making investors increasingly nervous. Volatility was through the roof. The market was shifting up and down.
A record single-day point gain in the Dow Jones Industrial Average was followed two weeks later by the largest single day loss in history. The Dow shed 508 points — 22% — leading to a $500 billion loss for investors.
The truth is Black Monday was the result of a handful of factors that pale in comparison to what we are seeing today…
Automated trading, overvaluation, illiquidity, and fear drove the losses in 1987.
All of these factors can — and will — make crash-induced losses worse today.
There are a seemingly endless number of solid reasons to fear what could be right around the corner. But investors should never let fear of a loss dictate how they invest; instead of letting market fear build up and paralyze portfolios, investors simply have to be prepared.
Fear is what drove Black Monday to a 22% drop. Fear drove the 2008 crash to cut the Dow Jones Industrial Average in half. Shortly thereafter, big drops turned into massive gains.
That is precisely what we are waiting for.
It’s what will transform a downturn in the next few months into a great opportunity for smart investors. We should be practically salivating at the potential for gains:
If you bought into the Dow Jones Industrial Average at the top of the bullish market right before Black Monday, you would have had to wait until August of 1989 to just break even at the 2,722 high in August 1987.
If you bought the Dow after the dust settled at the end of October 1987, you’d have banked a 38% gain as everyone else broke even.
A similar thing would have happened during and after the 2008 crash…
If you bought in at the height, when bullish sentiment was still strong but the economy was looking patchy, it would have taken almost a full four years to break even.
Let’s say you saw the Dow bottom out at 6,627 on March 6, 2009, and you waited a month to make sure it wasn’t going to nosedive again…
The market maintained a strong upward trend over the month; the dust had settled and it was time to jump back in.
And you would have walked with a 65% gain as your fellow investor who followed bullish sentiment and invested at the worst possible time was breaking even.
This is how disciplined investors make their fortunes.
Fear creates opportunities that you cannot miss. But you must be ready to jump back in while countless other investors are licking their wounds.
Of course, this is only half the story…
You’ll miss countless opportunities if you wait for massive market corrections. Once again, discipline is the key. Be prepared and do not panic.
If you’re worried about a market collapse, you have the tools you need to limit losses through your broker. You should always consider putting a stop loss or trailing stop loss on any position in your portfolio.
Let’s say you bought in while the Dow was at 13,058 on May 2, 2008, with a 10% stop loss. You would have seen your position automatically sell at 11,752, and the Dow would continue down to 6,627 without you.
If you stayed disciplined and bought back in, you would have almost doubled your position size after a 10% loss, while the people stuck riding the crash to the bitter end lost nearly half their investment.
(And remember, individual stocks suffered just as much during the crash and recovered far faster than the blue chip index.)
I’m not going to lie to you; it’s not easy to uphold discipline needed to succeed in a down market on your own…
Everyone fears what could happen in the next couple months. Anyone who doesn’t is a fool.
For your sake, I hope you choose the disciplined approach and keep an eye out for the bottom. The right mix of patience, discipline, and impartial market analysis can guide you through any drop and allow you to thrive as an investor.
As we discussed earlier, you don’t have to catch a falling knife. After missing out on a full month of gains in the Dow after the 2008 crash, there was still a 65% gain to be made as everyone else broke even.
Nick Hodge posted a 46% gain in his portfolio in 2008 using these very tactics.
His current portfolio is on track for another successful year…
Nick’s discipline, due diligence, and thorough analysis on plays like this one are the reason he posts winners — even in the most volatile of markets.
The fear in the markets will make or break you.
Thankfully, you have time to get invaluable expert advice and structure your trades to thrive when a downturn arrives.
For Your Prosperity,
Adam English
for Wealth Daily
