Black Monday 1987: what the worst stock market crash in history teaches UK investors

Five minutes a week that makes you smarter and calmer about your own money — plus a look at what I’m actually doing with mine…

The worst day to buy shares, ever

Thirty-nine years ago yesterday, the American stock market lost a fifth of its value in one afternoon.

On Monday 19 October 1987 the S&P 500 fell 20% in a single session and the Dow fell 23%. Both are still the biggest one-day falls on record. Nothing since, not even Covid, has come close.

Now imagine you’d bought on the Friday before, the worst-timed purchase in the history of the stock market. If you sold on Monday, a fifth of your money would be gone.

If you’d done nothing, you’d have had it all back within two years. And today you’d have 27 times what you put in, plus nearly forty years of dividends.

Chip shares fell eight days in a row to Friday, their longest losing run since 2008, and the companies building AI data centres led the way down. The Nasdaq lost about 4.5% on the week and clawed back 1% of it yesterday.

Oil stayed above $100 a barrel as Iran tightened its grip on the Strait of Hormuz and three tankers were damaged.

The market now puts the chance of an interest rate rise on 28 October at about one in seven.

Last week the market stopped asking whether AI works and started asking who pays for it. The companies building the data centres have been borrowing to do it, and last week the doubt was about how safe that borrowing is.

For your tracker this matters less than it sounds. The S&P 500 fell 2% because the giant technology companies that make up the biggest part of it fell. The other 490 or so did fine.

I hold the index two ways: VUAG, the ordinary version, and an equal-weight version, where all 500 companies count the same. Since last week’s letter VUAG is down 2.4% and equal-weight 0.7%, and that gap is why I own both.

I’m opening a new position this week. I won’t name it here, but I’ll tell you what it’s for.

Every pound I hold in ETFs is in America or in emerging markets, and nothing is in Europe, Japan or the UK. For years that was the right call, because America’s biggest companies have been the best investment in the world.

Last week was a reminder that when a handful of those companies have a bad week, the whole index does. So I’m adding a fund that owns the developed world outside America, around eight hundred companies across Europe, Japan, Canada and Australia. It sits alongside the American core; I’m not selling any of that.

Full members get the details — the fund and the price I paid; free readers get the thinking.

If you’re just buying what you fancy, with no method behind it, your results come down to luck, and luck can be good or bad. If you have more knowledge, experience and data than I do, then back yourself and go it alone.

If you don’t, £15 lets you see what I’m doing with my own money, and why.

My portfolio is here:

timswealthletter.com/my-portfolio

Peter Lynch ran the Fidelity Magellan fund for thirteen years and made 29% a year doing it. In October 1987 he was on holiday in Ireland, and he came home to find his fund had lost about a third of its value, more than $4 billion, in a week.

He sold nothing. “We’re fully invested,” he said, “at the bottom and the top.” The 29% a year includes that week.

Lynch’s rule of thumb: the market falls 10% about every two years and 25% about every six. Nobody can tell you when. The one thing you decide in advance is what you’ll do when it arrives, and the right answer is almost always nothing.

“October is the month markets crash.”

It has this reputation, and it has earned some of it: five of the ten worst days since 1950 were in October. But take all the Octobers since 1950 together and the market has averaged a gain of 0.9% and finished the month higher 59% of the time.

The month that loses money on average is actually September.

This is the thing I said was coming. An hour on Zoom with me, going through what your adviser really charges you, what leaving involves, and how I run my own money. By the end you’ll know whether leaving is right for you, and if it is, what to do first.

It’s £250, one-off, which is less than a month’s adviser fees on a £250,000 pot, and if you come off the call not knowing what to do next, I’ll refund it. I’m doing ten at this price. Reply to this email with the word call and I’ll send you the details.

If you joined this month, this issue might read as a reason to stay away. It’s the opposite. The market has lost a fifth of its value in a day exactly once, and the people who stayed in made 27 times their money.

A cheap S&P 500 tracker, bought regularly and left alone, will do better than most financial advisers, crashes included. To learn more, start here.

The crash reached London late because of the weather. On the night of 15 October 1987 the Great Storm flattened fifteen million trees across the south of England, hours after Michael Fish had famously told the nation there would definitely not be a hurricane!

Most of the City couldn’t get to work on the Friday; trading was suspended twice and the exchange shut at half past twelve.

So London missed the start of the sell-off, and caught up on the Monday and Tuesday by losing more than a fifth of its value in two days. I was a very young and green investor then, and to be honest I can’t remember what I did, but I think I probably sold!

See you next week.

Tim

I am not a financial adviser. Nothing here is personal financial advice. Please do your own research before making any investment decisions.