10 lessons from Black Monday
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Tom Stevenson is an investment director at Fidelity Worldwide Investment. This article was written for UK investors but will be of interest to Australian investors.
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 subsequent recovery.
2. Look through the market gyrations to what is happening in the real world. The 1987 crash was triggered by over-exuberance (the market had risen by nearly 40 per cent in the first nine months of 1987) and was then compounded by automated computer trading. The underlying economy was sound at the time - hence the quick recovery.
3. Take a long-term view. The 1987 crash looks insignificant on a long-term chart today even though, at the time, it felt like the end of the world.
4. Be prepared for the worst and don't put all your eggs in one basket. I was in Hong Kong at the time of the 1987 crash - the market there shut for a week, emphasising the point that emerging markets can sometimes be markets from which it is difficult to emerge in an emergency.
5. Don't try and 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 do the reverse - they 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 and even though your mind is telling you to put your money under the mattress.