Friday, October 22, 2010

Happy Anniversery Crash Of 1987

BirthdayImage via Wikipedia
Did you ever forget your anniversary? Well here's one we all would like to forget. The stock market crash of '87. It was October 19, 1987 when The Dow Jones Industrial Average dropped 508 points. This day has become known as "Black Monday". It was 23 years ago when this frightening day happened. 
 
We look back and think that it fell only 508 points, no big deal when we just had the recent drop on May 6 of 998.50 points. Only remember in 1987 that drop was a 22.6% of a Dow of only 1,738. The May 6 drop was only a 10%. If you had a 22.6% drop of today's Dow of 11,147, you would have a drop of 2519 points. They would be jumping out the windows on Wall Street. 
 
Could something like the 1987 drop ever happen again? According to expert finance professor Xavier Gabaix, of New York University, plunges as big as 1987's Black Monday while rare are an inherent part of the investing landscape. ( I only cringe more when I hear an economics professor.) 
 
Professor Gabaix discovered that the frequency of these huge plunges follows the known tendency of "Zipf's Law". A crash like 1987's will occur once every 75 years. With human longevity ever increasing this is not good news. I may live to see another 1987 crash. Naturally the law doesn't tell us when the crash may occur.   


Performance of the Dow Jones Industrial Index ...

1 comment:

  1. I would love to go back in time and have the opportunity to invest right after that crash. I can't tell you how many of my friends bailed on the market after the crash. What an opportunity they lost.

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