25 Years on, Black Monday Was Not So Bad After All

By Financial News
25 Years on, Black Monday Was Not So Bad After All

This Monday marks the 25th anniversary of one of the darkest days in the history of the global economy – Black Monday.

Black Monday was on October 19, 1987, the day when the bottom dropped out of markets across the world.

Share values plunged in the US, UK and Asia, and the losses continued to mount in the succeeding days.

To many at the time, Black Monday was almost the end of the financial world as they knew it, but today it looks like no more than a blip when viewed with hindsight, as data gathered by JP Morgan Asset Management illustrates.

Although investors do not want to see their cash diminish as a market falls, the figures show that most made a significant recovery by playing a long game.

How investments have fared since Black Monday

Taking the example of £100 invested in a selection of investment trusts managed by JP Morgan Asset Management on September 30, 1987, Black Monday and the additional declines of October 1987 wiped up to 40% off the initial investment, but most were back above water within two years.

With the exception of Japan, which has faced a succession of economic problems, all have shown gains of at least 400% on a total return basis with income reinvested during the past 25 years.

David Barron, head of investment trusts at JP Morgan Asset Management, said: “Although there was a feeling of panic around Black Monday, looking back on it now, it was a small blip in overall equity market performance.

“Markets have periods of excessive discounting of future earnings and periods of over-optimism, but as very long-term data sets show, ultimately, there is a reversion to fair value. The overall trend is for equities to do better than cash or gilts for long-term investors.”

Looking at equities, the FTSE 100 went from 2373.8 points on September 30, 1987 to 5711.5 points on August 31, 2012 – a return of 240.6%, but far behind the 518.7% return of the FTSE 100 with dividends reinvested.

Lesson for equity investors

The Halifax House Price Index shows the average house price rose nearly 400%, from £47,248 in September 1987 to £160,256 in August 2012, while the price of gold saw a similar increase, from $454.90 on September 30, 1987 to $1,692.01 on August 31, 2012, a rise of 372%.

During the same period, cash has returned an average 1.1% per year, according to data from the Barclays Capital Equity Gilt Study.

“It is worth remembering that 1987 was also the year that personal equity plans, or PEPs, were introduced, giving the opportunity to own shares and funds in a tax-favoured wrapper, so investors would have had the chance of largely tax-free income and gains since Black Monday, too,” said Barron.

“The important lesson for long-term equity investors is to stay invested through the ups and downs. It is very hard to time entry and exit points accurately, and the best days of returns often come soon after the worst days. Over the long term, if you pick good funds and managers, diversify your asset allocation and reinvest your dividends, you are unlikely to go wrong.”

Tagged under: