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Lessons Learned from 1907 and 1987

B400 or B-52 Bomb

Lessons Learned from 1907 and 1987

By Ron DeLegge, Editor

October 1, 2007

 

This month marks the 100-year and 20-year anniversaries for two of the biggest financial jolts of our modern era.

 

It's been said those who ignore history are doomed to repeat it, so it's only fitting that we press the playback button and learn from the past.

 

On October 17th, 1907 the stunning collapse of New York's famed Knickerbocker Trust Company triggered financial hysteria everywhere. Lines in front of banks formed and stocks dropped nearly 50 percent from their 1906 highs. In the days that followed, money became scarce, banks went out of business, and even the city of New York teetered on the verge of bankruptcy.

 

Total financial ruin of the U.S. economy was headed off by J.P. Morgan and a group of courageous banking executives who formed a plan to squeeze liquidity into the economy. Years later, in 1913, Congress passed the Aldrich-Vreeland Act which eventually led to the formation of the Federal Reserve System.

 

80 years removed from tumultuous events of 1907 came October 19th, 1987. This particular day reminded the world that shocks in financial markets can still happen, despite the maturation of capital markets and the invention of regulatory systems designed to protect it. The Dow Jones Industrial Average single-handedly dropped 22.6 percent, spurring a similar descent in world markets. Interestingly, no major news or events happened to provoke or explain the market's swift plummet in 1987.

 

What can we learn from history?


Lesson #1: Panicking is always a losing strategy

Sellers that exited the stock market in 1987 and never returned missed roughly 700 percent of gains from Dow Industrial stocks over the next two decades.

 

Lesson #2: Diversifying can help to limit financial damage

While diversification isn't intended to completely prevent losses, it can help to reduce portfolio risk and volatility. Those that hold a broad spectrum of asset classes, such as stocks, bonds, commodities, real estate, and cash during a financial crisis - usually fair the best.

 

Lesson #3: When the next market crash happens, be a buyer not a seller

Ever heard the expression buy low sell high? In retrospect, all market plummets turned out to be a great investment opportunity. History proves that opportunistic investors are rightfully rewarded, whereas cowards are penalized.

 

To summarize, there's so many lessons to be gleaned from considering a short history of the financial markets - and 1907 and 1987 provide us with plenty.

 

Mark Twain said, "History may not repeat itself, but it rhymes."

 

Whenever the next market crash, slowdown, or recession happens - and no one knows with any certainty the exact timing - be ready to profit from the opportunities that present themselves.

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