The morning of Monday, Oct. 19, 1987, was supposed to be a pivotal day. Would equity buyers emerge, taking advantage of the prior week’s instability, or would sellers continue to chip away at the sizable year-to-date gains?
At the time, I was a 29-year-old director of portfolio management at Old Kent Bank, responsible for supervising the entire Grand Rapids portfolio management team and most of the bank’s largest client accounts. It had been a stellar year so far for our clients, with stock market averages up more than 40 percent. Yet, all of that was about to change, as a massive selloff in global equities was underway that morning.
I recall sitting at my desk that morning watching the stock quotations on the screen. Every single one of them was rapidly flashing red — there was no green to be found. Throughout the day, the investment team huddled around the trading desk, nearly frantic as we witnessed the bloodletting. A cloud of cigarette smoke hung above the desks, office ashtrays filling more rapidly than normal.
Anticipating calls from clients, we sought insight and wisdom from our friends on Wall Street. Needless to say, if any analyst could be reached by phone, there was nothing consoling he or she could offer. The selling pressure was massive and unprecedented.
By the end of the day, the Dow Jones Industrial Average had plummeted 508 points, or 22.6 percent of the previous day’s value. To put that in perspective, an equivalent decline today would send the Dow Jones index tumbling by more than 5,000 points — in one day. Whether you are an equity investor or professional investment advisor, just close your eyes and picture all your portfolio gains since January 2016 — a period of more than 21 months — evaporating in a single day.
After the markets closed on what will long be remembered as “Black Monday,” our investment team adjourned to a watering hole across the street in an effort to comprehend the magnitude of what had just happened. We had all endured prior periods of market disruption, but nothing of this magnitude. One could not help but feel anxious over the prospects of what the next day might render in terms of additional fallout.
Arriving at the office the morning of Oct. 20, the bank’s chief investment officer gathered our team together and announced now was the time to be buyers of stock — significant buyers. While not calling current levels as a bottom, the CIO felt valuations had greatly improved with the previous day’s decline and boldly asserted the bank’s investment clients would be rewarded by this strategy. Boy, this was a surprise to all — a very risky move to say the least, but we moved forward and, account by account, entered our purchase orders.
The market remained choppy over subsequent weeks but actually ended the year modestly positive. While likely having some negative effect on economic growth, no recession materialized afterward, and by the summer of 1989, the Dow Jones Industrial Average had recovered all the losses experienced on that Black Monday. The additional purchases we made in the accounts proved the right thing to do — and quite rewarding.
Black Monday was historic and, looking back 30 years later with the benefit of hindsight, proved to be a watershed for me. There were to be additional periods of market upheaval to experience, all triggered by unanticipated events — Desert Storm, the dot-com bubble, 9/11 and, of course, the mortgage crisis some nine years ago.
In each instance, the loss of investment value primarily from equities created emotional discomfort and, for some, a need for action. One might feel compelled to sell alongside others to avoid further losses and just to “sleep better at night.”
Yet, selling on short-term declines converts paper losses into permanent losses and now introduces an additional decision as to when and under what circumstances to re-enter the stock market. In my experience, an individual’s comfort with getting back into stocks is typically after the market has rebounded to levels higher than at the time of their sale.
Investors in common stocks should adhere to a time horizon of at least five to 10 years and establish a strategic allocation to stocks that reflects their individual goals and tolerance for risk. Enduring market volatility is part of investing in stocks, and there will be future downturns that investors will have to contend with. We just hope none will be like Black Monday.
Discipline is required to not react with emotion and abandon your investment plan when extreme market conditions prevail. The markets will recover, as evidenced by the history before the crash and three decades afterward. And if the circumstances warrant, look at any meaningful decline as stocks going on sale. Who doesn’t want to purchase more of something when it is on sale?
That may or may not be what your investment specialist will advise you to do. But speaking as one of the area’s few investment experts who can say he had a front-row seat to a seminal event of 30 years ago, I’m convinced that the savvy investor should carefully consider long-term options over knee-jerk reactions that can compound the damage already done.
William A. Walker is the founder and principal of Ivison Consulting, an independent financial consultant based in Grand Rapids and serving all of Michigan. He can be reached at bill@ivisonconsulting.com.
