Remembering the causes of past stock market crashes.
Discussion
"It's different this time."
Really.
Be on your guard.
Knowing and remembering the causes and event sequences of historical stock market crashes, can be helpful for us when following market activity.
Many people mention stock market crashes, as being the reason why they never want to invest in equities.
Certainly they are probably influenced by dramatic media headlines, but for those of us who like to buy when prices are low, such events are fairly rare. 1987; 2000; 2008; 2022 have been the main crashes in recent times.
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1987
This was interesting because as you can see from this chart, the stock market increased by 50% in 7 months.
What does that tell you?
Amid all of the panic selling, long-term holders who remained calm and did nothing (perhaps even added to their existing holdings) ended the year about 4% up, plus dividends received. Overall, a reasonable year.
I think I am correct to say, just before that crash, people had applied to buy shares in the BP privatisation at a fixed price.
Before they had even received their share certificates, the BP share price had tumbled.
Many of those applicants would have been first time share buyers.
They probably never invested in shares ever again.
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2008
Apart from a huge increase in property values, a modest size mortgage lender (Northern Rock) announcing that they were handling 25% of all new mortgages, and a TV programme filming 'liar loans', there was very much else to suggest a global crash was coming.
If you like a humorous approach, this video clearly explains what led to that stock market crash.
https://youtu.be/mzJmTCYmo9g?si=6crTJ2yY2ISpTqut
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Although these past events are dramatic and many investors lose money, this very long-term chart puts matters into perspective.
The huge October 1987 fall in just a few days, can be seen as just a tiny blip on this chart.
Edited by Jon39 on Sunday 6th July 12:33
Douglas Quaid said:
As someone who s recently started investing, I m all for a crash to allow me to load up on shares. I don t really understand selling when prices go down. Surely that s the time to buy? It s an odd mindset to buy high and sell low.
At the time, nobody knows where the bottom is going to be - and that's talking diversified options like index funds, where we know there will be one. For individual shares, we don't know what the exposure is going to end up being and therefore whether it will actually even survive a whole market crash. So you are right, but it's much easier to say in retrospect. The other thing is, if you've got cash to potentially invest, and you're suddenly looking at a major economic downturn, is it actually going to be wise to lock that money away (or keep it locked away) any more? Because there's probably now an elevated risk that you might lose your job or, say, suffer a mortgage hike, or some situation where you really want that cash freely available.
All these graphs are post the "Nixon Shock" and the proliferation of debt. All stock market crashes are either fixed by debt or as a result of a broader range of measures fix causes debt to jump up, 1982, 2008 , covid.
So presuming this can carry on and the next generation talk about Quadrillions like we talk about trillions today (a number I'd never heard of growing up) and Japan has a 400% debt to gdp ratio and the rest of us are on 200%, then what does that look like?
Well maybe those wealthy enough to have stocks and other assets do ok/great, those without have a reduced chance of ever doing so, the wealth divide increases the have's don't want to give up what they have and the have nots are in poverty and powerless.
Inflation on essentials continues to climb, retirement age gets pushed out, student loans get extended and added to inheritances, we start to lose the NHS or have to part pay, things that are happening now but just more and faster...........and yet some individuals will by then have trillions and own between them most of the real estate, utilities etc? they will have the other side of the debt, because it won't be countries or most of the populace will it?
But yes in our lifetimes you can probably continue to rely on any crash rebounding in a reasonable time frame, it's what the country, town, hamlet looks like around you as the years go by that might be of more concern?
So presuming this can carry on and the next generation talk about Quadrillions like we talk about trillions today (a number I'd never heard of growing up) and Japan has a 400% debt to gdp ratio and the rest of us are on 200%, then what does that look like?
Well maybe those wealthy enough to have stocks and other assets do ok/great, those without have a reduced chance of ever doing so, the wealth divide increases the have's don't want to give up what they have and the have nots are in poverty and powerless.
Inflation on essentials continues to climb, retirement age gets pushed out, student loans get extended and added to inheritances, we start to lose the NHS or have to part pay, things that are happening now but just more and faster...........and yet some individuals will by then have trillions and own between them most of the real estate, utilities etc? they will have the other side of the debt, because it won't be countries or most of the populace will it?
But yes in our lifetimes you can probably continue to rely on any crash rebounding in a reasonable time frame, it's what the country, town, hamlet looks like around you as the years go by that might be of more concern?
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