How to cope if worst happens to investments
How you remember 1987 may well depend on your TV interests (The Simpsons first aired on the Tracey Ullman show, Star Trek: The Next Generation premiered); your interest in statistics (the global population is estimated to have reached five billion); your interest in the weather (hurricane) and whether you had money invested ("Black Monday").
Twenty-five years on, 'D'oh' is now in the Oxford English Dictionary, Captain Picard has retired, Michael Fish still gets reminded, and the global economy faces a new set of challenges – including a eurozone debt crisis, and slowing economic growth in China.
How should investors cope if the unthinkable happens again? Tom Stevenson, investment director at Fidelity Worldwide Investment, highlights ten lessons to learn from the 1987 stock market crash:
1. Keep calm and carry on – the FTSE 100 ended 1987 higher than it started and within two years the index had surpassed its pre-crash peak. By the time you have recovered your equilibrium, the moment to sell has very likely passed and by panicking at this stage you will simply miss out on the recovery.
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2. Look through the market gyrations to what is happening in the real world. The 1987 crash was triggered by over-exuberance and was then compounded by automated computer trading. The underlying economy was sound at the time – hence quick recovery.
3. Take a long-term view. The 1987 crash looks insignificant on a long-term chart today even though it felt like the end of the world.
4. Be prepared for the worst and do not put all your eggs in one basket.
5. Do not try to time the market. When your emotions are running high you will make the wrong investment decisions because our brains are hard-wired to run from danger. The best investors walk towards danger, albeit with their eyes wide open.
6. Invest regularly, a little at a time. This way, you will take advantage of market falls like the 1987 crash, picking up a few shares or units in a fund when they are cheap.
7. Reinvest your dividends – if income from equity investments is not required, the reinvestment of dividends can have a profound effect on investment performance.
8. Keep some of your powder dry. Crashes happen, and when they do you want to have some ammunition ready to take advantage.
9. Beware of buying high and selling low. Remember the stock market is the only market in which we prefer to buy when prices are high and are put off by low prices.
10. Watch costs but worry more about value. The difference between the charges on an actively-managed fund and a tracker might be 1% a year.