On 19 November 1987, a stock market crash shook the foundations of financial institutions around the world. Coined Black Monday, this event demonstrated the relationship between global markets and the impact on investor confidence. Many financial planning lessons have been learned from this infamous crash. Let’s look at the key takeaways.
What caused the Black Monday stock market crash?
At the time, Black Monday represented the most significant fall in the global stock market in a single day. In the United States, the Dow Jones index fell by 22% (508 points). In the UK, the FTSE 100 fell by 14% (296 points), but two days later it had dropped by 23%. Over the following weeks, the downturn continued across the globe, as most major stock exchanges fell by 20%. This highlighted the concept of globalisation, which was relatively new in the late 80s.
Key causes
1. Computerised Trading: In the 1980s, the stock market began to rely on automated trading systems, which used algorithms to execute large buy or sell orders. While these systems were designed to protect investors from significant losses, they ironically amplified the panic, triggering massive sell-offs once critical thresholds were crossed.
2. Market Psychology: Investor sentiment played a significant role in the crash. As stocks began to fall, the sell-off snowballed, with fear and panic spreading quickly across the market. Even though the market’s fundamentals were relatively strong, it was this psychological effect that accelerated the crash.
3. Interest Rate Concerns: Leading up to Black Monday, there were growing concerns about rising interest rates in the U.S., as the Federal Reserve was tightening monetary
policy to control inflation. Higher rates made bonds more attractive than stocks, causing some early sell-offs.
Although there had been a global bull market trend for the past five years, in the days preceding the event, stock market indexes had a bearish week. Investor fears were growing due to a stock market decline, slow economic growth, and rising inflation. The US also introduced a series of bills and foreign trade agreements, which negatively impacted the value of the US Dollar.
Financial crash prevention measures
Black Monday teaches us the importance of trading risk and investor confidence and the impact this can have on financial markets. The event showed a clear correlation between how different global stock markets are linked and the need for adequate safety measures.
Below is a list of key learnings and measures that have been introduced as a result of the Black Monday crash:
- Trading curbs and circuit breakers were introduced as a protective measure to prevent this type of stock market crash from reoccurring. This emergency regulatory measure temporarily halts trading on a stock exchange to prevent panic selling.
- Diversify your investment portfolio across different types of assets, such as stocks, bonds, real estate, and private equity. This enables you to build a safety margin to help protect your portfolio from market shocks.
- Long-term investment strategies will enable your portfolio to survive stock market volatility. Your investments will naturally rise and fall throughout the years, so don’t panic when there are market fluctuations. A long-term perspective is the key to successful investing.
- Build a financial buffer and avoid excessive debt to prepare for market uncertainty. By building a separate savings pot using a tax-efficient strategy, you will have your own safety net when there’s market volatility.
- Invest Consistently – Investing regularly, regardless of market conditions, allows you to take advantage of market dips. If you’d continued investing during and after Black Monday, you would have picked up shares at bargain prices—despite every instinct telling you to hold onto cash. This approach smooths out the bumps in your investment journey.
- While it’s essential to be mindful of fees and costs, don’t just go for the cheapest option. What really matters is your risk-adjusted return after fees. Sometimes paying slightly more for quality or expertise can generate significantly better results over time.
Certified Financial Planners
Balance: Wealth Planning has a team of qualified, certified financial planners with decades of experience to help you build and protect your wealth. We have two successful, well-diversified ranges of in-house investment portfolios, which consistently perform well and minimise market volatility. There’s a responsible investment option and ten risk levels.
Our award-winning financial planning firm will listen carefully to your goals to understand what you want to achieve. We can review your current investments and help you diversify your portfolio. Our team’s aim is to make your money work harder but in a safe, tax-efficient way that ensures sensible investing and savings strategies.
If you need to review your investment strategy, get in touch to speak to our financial planning team.
