Saturday, October 14, 2017

Risk and the 1987 stock market crash

This coming week marks the 30th anniversary of the 1987 stock market crash. On 'Black Monday', the world's equity markets were in chaos.

Following this, circuit breakers were introduced in an attempt to prevent such dramatic one-day moves. These were further strengthened following the May 2010 'Flash Crash'.

Back in the summer, there was a sharp one day fall in the Nasdaq. If you were heavily involved in some of those high-flying tech stocks, then that could have been an uncomfortable day - both financially and emotionally. There was some sharp selling back in August 2015. In both these cases, the markets recovered relatively quickly, and such episodes tend to be forgotten.

In percentage terms though, these price moves were nothing compared to 1987, or to that seen if you were trading the foreign exchange markets the day the floor on the Swiss France was removed a couple of years ago, or even to those seen on a fairly regular basis back in 2008.

Nothwithstanding the 2010 Flash Crash, people who have entered the stock market since the 2008 downtrend have never experienced the price moves (in percentage terms) and volatility seen back then, and therefore have not suffered the pain that such an event could cause.

Am I suggesting we are going to have a crash? No, of course not. As you know I follow price, and the markets at the moment (particularly in the US and Japan) are only heading upwards.

But if you truly believe that anything can happen in the markets at any time, then something or someone, somewhere, could act as a trigger for some frantic selling, resulting in a sharp move.

Don't become complacent about it, and learn from the lessons of the past.

ALWAYS keep an eye on risk.

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