The forgotten flash crash and how advisors can learn from it

October 13, 2017 by Sean Marus

Volatility is inherent within the stock market.

about the author:

Sean Marus

Product marketing specialist

With years of experience in product marketing and content generation in the financial services industry, Sean is committed to providing informative and impactful content to financial professionals and the clients they serve.

On October 19, 1987, the stock market plummeted in a truly unprecedented fashion. Though there was notable tumult in the markets in the months preceding the drop, few, if any, foresaw that “Black Monday” would result in a drop of nearly 22 percent in the Dow Jones Industrial Average (DJIA). For some context, the second-highest single-day decline of the DJIA was just over half of that amount. Ultimately, it would take nearly a year and a half for the DJIA to regularly stay above the opening price of Black Monday.

Although flash crashes like Black Monday are rare, significant unforeseen market downturns have still been known to occur. The DJIA has experienced single-day drops of more than 7 percent on 19 separate occasions. However, sudden downturns do not always come at once; sometimes they occur over a span of weeks or months.

When investors are panicking, stock market bears are urging the public to sell, and the madness that inherently coincides with investing runs rampant, that is when the true value of a knowledgeable financial advisor becomes evident. As a financial professional, knowing the past — and how the public reacted to it — will help you assert yourself as an invaluable asset to your clients’ lives.

Those who do not remember the past . . .

As famed financial columnist Morgan Housel once said, “Our memories of financial history seem to extend about a decade back. ‘Time heals all wounds,’ the saying goes. It also erases many important lessons.” Though Black Monday occurred just 30 years ago, it is rarely mentioned by financial speculators and media pundits.

The general public is swept up in immediacy from news sources. This comes with speculation on when the next recession will strike, skeptical optimism about the current (and incredibly long-running) bull market, and anxiety about how the federal funds rate will affect the economy.

Rarely, however, do we look past the Great Recession for insight from Black Monday or even the Dot-com Bubble that caused a 78 percent drop in the NASDAQ index between March 2000 and October 2002 (which took 13 years to reach the same heights).

Since October 1987, the DJIA has climbed at an annual rate of nearly 11 percent (including reinvested dividends); meanwhile, since the nadir of the Dot-com Bubble, the NASDAQ has shown annual growth of over 12.5 percent.

At the time, these economic events dominated news outlets similar to the ubiquity of coverage surrounding the Great Recession just 10 years ago. But the passage of time has eroded our perception of the impact of these events which, when they were occurring, seemed borderline apocalyptic for investors.

Similar to how advisors were wise to stay the course in wake of indecision surrounding the DOL fiduciary rule, investors must take the difficult route and remain level-headed when the easy reaction is to sell in a panicked frenzy. As a financial professional, you can help coach your clients through these stressful times and lead them toward their desired financial future.

Providing clarity to clients

Black Monday and the Dot-com Bubble are just a few examples of the extremely mercurial nature of investing. If an investor stays the course in wake of adversity, over time, he or she will almost certainly be rewarded for their patience and long-term mindset with returns that make up for the short-term losses.

Communicate with your clients. Remind them that investing is inherently risky and that occasional losses are basically inevitable. Send them relevant content, like that offered in Advisor Briefcase, to educate them on investing. If your clients are aging and/or risk-adverse, discuss their current asset allocation and work toward a more appropriate blend of asset classes for their investing strategy.

As an advisor, it is paramount that you do not fall victim to the euphoria of a bull market that enraptures many investors. It is equally vital that you do not let your clients become complacent in their investing strategy. By offering objective advice — especially when knee-jerk subjectivity is prominent— you will differentiate yourself as a vital part of your clients’ financial future.

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