The 19th day of October in 1987 was a historic Monday in the investing space as stock markets across the globe crashed, with Dow Jones slumping 22.6%, which resulted in $500 billion in share values going up in smoke.
In a commentary on the Motley Fool, industry watcher Harvey Jones spoke about the speculation about another potential Black Monday, which is heightening given the long bull run in the markets.
Interestingly, the 1987 Black Monday was preceded by a strong market run, with the Dow Jones' 30 industrial stocks averaging a stock growth of 27.66% in 1985 and 22.58% in 1986.
"By August 1987 the US market was up another 40%, but then investors started to worry that shares were overvalued. You can see why people are keen to draw parallels with today, as the current bull run has lasted well over eight years and stocks look pricey," Jones stated.
Looking at the current the Shiller PE measure, valuations sit at 31. Prior to the 1987 Black Monday, valuation peaked at 17.5. Should investors be scared of another crash coming?
For Jones, stock markets will inevitably crash at some point.
"Nobody knows when this will happen, whatever they may claim. So please do not rush to sell now, as markets could just as easily power higher. Also, even if markets do crash, it does not matter, really." he said.
The true lesson came after Black Monday, with markets rapidly recovering. In the next year, the Dow jumped 11.85% and then leapt 26.96% in 1989.
"Markets always recover, if you give them time. Provided you are invested for at least five or 10 years, you can afford to sit tight," Jones stressed.
He explained that should markets crash, the sensible thing investors can do is to buy shares.
"Good companies will get sold off with the bad, so find those companies, and pick up their stock at the new reduced price. Then simply sit back, let the dividends roll up, and wait for share prices to rise again, as they always do," he said.
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