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 a huge 25% of all new mortgages, and a TV programme filming 'liar loans', there was not very much else to suggest a global crash was coming. Parcelling together low grade mortgages in America, then selling them as high quality securities, was not widely known at the time.
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 Wednesday 9th July 23:08
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?
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.
Because it is only with hindsight you know what Low and High actually are. When prices are falling people sell because they are worried they are going to fall more, it takes big balls to hold and just assume it will rebound at some point.ColdoRS said:
Do you have the source for the final graph? Quite startling if it's legitimate.
Search London Stock Market chart 1970 onwards. You should find a selection.
Very long term charts can look startling, because we often forget about inflation.
A Ford Escort in the early 70s cost about £700, but the average annual earnings then were about £1,600
ThingsBehindTheSun said:
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.
Because it is only with hindsight you know what Low and High actually are. When prices are falling people sell because they are worried they are going to fall more, it takes courage to hold and just assume it will rebound at some point.DQ - You have the correct understanding. Many people however seem to behave differently with shares, than they do when shopping. Need a psychologist to explain why.
I think it might be to do with excitement and fear. Notice a share price has risen considerably, then buys. It continues to rise and they are pleased. A sudden downturn occurs, they watch the share price falling, get frightened and sell. Often selling at a loss.
When the same people are In the supermarket, they see a price has increased, so might refuse to buy.
Need to gain experience of business and markets.
In simple terms PE ratios can provide some guidance, both for individual businesses and markets.
Search for a chart of PE ratios over time.
TBTS - Ref. buying during a stock market downturn.
As you say, not easy and so many shareholders immediately do the opposite.
Where it does become easier, is after you have held individual share over a reasonably long period. You then get a feeling of which companies continue to trade fairly well during recessions. Products or services which are almost consumer essentials.
You then have more confidence that the business should remain profitable, so a much lower share price (and PE ratio) becomes an enticing and less risky opportunity.
I have found that the longer you have an interest in stock markets (owning parts of businesses) the easier such decisions become.
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If you want to study an enormous stock market crash, search back to the early 1970s.
Best not look at 1930 to 1950. The market took about 20 years to exceed the previous peak !
Edited by Jon39 on Monday 7th July 12:19
Someone else posted on here in another forum about a book regarding this called The Psychology of Money by Morgan Housel. I bought it for my 19 year old son and have just finished reading it after him. The takeaway I got from it was to invest young and leave your stocks alone for as long as possible. There will always be events which affect the market (9/11, Covid, etc) and trying to predict when these will happen is almost impossible. However, as we can see from the graphs the market usually recovers fairly quickly from the dramatic drops.
squeeam said:
However, as we can see from the graphs the market usually recovers fairly quickly from the dramatic drops.
That's been the case in recent years, but have a look back at more challenging periods such as the .com bust. Almost 6 years for global equities to recover, and the GFC was just around the corner. 20:20 hindsight is a wonderful thing.
Let's not forget 2025 has already seen a 10% drop followed by recovery. Anyone fancy predicting year end 2025? Not me, my strategy remains set to "caution".
Investing isn't comparable with shopping. People invest in the hope of making money, not spending it, and probably wouldn't pay a % of their spend for a "Shopping Advisrer". When people go shopping they don't usually buy a bit of everything in the shop (passive shoppers) and cross their fingers that it will all work out OK.
Ask me afterwards and I'll tell you how it went,
Big gains? Brilliant investment strategy.
Big losses? Unexpected market forces.
See also the government's position on inflation etc,
Going up? Nothing to do with us.
Coming down? We've brought it down.
Tax and spend? No, never.
Budget For Growth with increased taxes and spending? Certainly.
Let's not forget 2025 has already seen a 10% drop followed by recovery. Anyone fancy predicting year end 2025? Not me, my strategy remains set to "caution".
Investing isn't comparable with shopping. People invest in the hope of making money, not spending it, and probably wouldn't pay a % of their spend for a "Shopping Advisrer". When people go shopping they don't usually buy a bit of everything in the shop (passive shoppers) and cross their fingers that it will all work out OK.
Ask me afterwards and I'll tell you how it went,
Big gains? Brilliant investment strategy.
Big losses? Unexpected market forces.
See also the government's position on inflation etc,
Going up? Nothing to do with us.
Coming down? We've brought it down.
Tax and spend? No, never.
Budget For Growth with increased taxes and spending? Certainly.
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.
In early April this year the S&P500 had already shed about 8% to ~5600 and lots of copy could be found predicting it would bottom out as low as 4200. With internet and especially app-based trading platforms allowing you to sell pretty much instantly, it is obviously tempting to cash out if you're reading stuff like that. In fact it bottomed out at 5000 and on the 8th of April alone recovered practically half of its losses.
I read the book "The Black Swan: The Impact of the Highly Improbable" by Nassim Nicholas Taleb
wikiextract [ The book asserts that a "Black Swan" event depends on the observer: for example, what may be a Black Swan surprise for a turkey is not a Black Swan surprise for its butcher. Hence the objective should be to "avoid being the turkey", by identifying areas of vulnerability in order to "turn the Black Swans white". ]
Just because everyone is sure of something doesn't mean they are all collectively right or stay right.
The only thing i'm 100% sure of is that I shouldn't be 100% sure of anything.
wikiextract [ The book asserts that a "Black Swan" event depends on the observer: for example, what may be a Black Swan surprise for a turkey is not a Black Swan surprise for its butcher. Hence the objective should be to "avoid being the turkey", by identifying areas of vulnerability in order to "turn the Black Swans white". ]
Just because everyone is sure of something doesn't mean they are all collectively right or stay right.
The only thing i'm 100% sure of is that I shouldn't be 100% sure of anything.
Hustle_ said:
In early April this year the S&P500 had already shed about 8% to ~5600 and lots of copy could be found predicting it would bottom out as low as 4200. With internet and especially app-based trading platforms allowing you to sell pretty much instantly, it is obviously tempting to cash out if you're reading stuff like that.
In fact it bottomed out at 5000 and on the 8th of April alone recovered practically half of its losses.
It's still actually down for us as the USD has lost 10% in value against the GBP. So you are not just investing in the hope that the S&P500 will increase, but you are also hoping the exchange rate doesn't get worse.In fact it bottomed out at 5000 and on the 8th of April alone recovered practically half of its losses.
Terminator X said:
Regular investments over a very long period will always win surely, look at the graphs all upwards over enough time.
One off big sums no different to betting on the horses imho.
TX.
One off big sums no different to betting on the horses imho.
TX.
Agree.
When we begin investing, either by putting regular money in every month, or steadily building a portfolio over the years, it is effectively the same thing. A gradual increase in total savings, so smoothing market fluctuations.
After very many years, it might be decided that the portfolio is big enough. At that mature stage, internal growth together with dividend income will hopefully be driving progress, so introducing more cash then has less effect.
When that happens, if you have built the portfolio yourself, you might consider a peculiar situation.
A structured portfolio has been gradually constructed, is hopefully running well, so there is confidence that everything is OK.
Strangely though there is the thought, that if using a big sum now to purchasing all the identical holdings, it might be 'no different to betting on the horses'.
I suppose the reason for the actual risk being lower, is already having the practical experience of knowing how each individual business has been performing.
ThingsBehindTheSun said:
It's still actually down for us as the USD has lost 10% in value against the GBP. So you are not just investing in the hope that the S&P500 will increase, but you are also hoping the exchange rate doesn't get worse.
But you’re getting better bang for buck now as a U.K. investor so swings and roundabouts I suppose. ThingsBehindTheSun said:
Hustle_ said:
In early April this year the S&P500 had already shed about 8% to ~5600 and lots of copy could be found predicting it would bottom out as low as 4200. With internet and especially app-based trading platforms allowing you to sell pretty much instantly, it is obviously tempting to cash out if you're reading stuff like that.
In fact it bottomed out at 5000 and on the 8th of April alone recovered practically half of its losses.
In fact it bottomed out at 5000 and on the 8th of April alone recovered practically half of its losses.
It's still actually down for us as the USD has lost 10% in value against the GBP. So you are not just investing in the hope that the S&P500 will increase, but you are also hoping the exchange rate doesn't get worse.
A number of the very large UK listed companies, with international operations, now do their accounting in US Dollars.
Therefore, as well as the value effect of the FX move this year that you mention, we have also experienced that through dividends.
Obviously over the years, we have sometimes seen FX move in our favour, but recently it has moved against us.
Examples of some changes, as 2025 has progressed ;
Dividend increase announced in $ ................ Amount paid in GBP
+ 4% ............................................................................. + 3%
+10% ............................................................................ + 9%
+16% .............................................................................+10%
+ 1% ............................................................................. - 3%
+10% ............................................................................. + 4%
+ 0% ............................................................................. - 6%
+ 4% ............................................................................. + 0%
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On a different subject, here are some figures of interest to index fund holders;
.................. S & P 500 ............... FTSE 100
YTD .......... + 5.92% ................... + 7.88%
1 Year ...... + 11.91% ................... + 7.61%
3 years .... + 59.64% ................. + 22.52%
5 years .... + 98.07% ................. + 43.22%
USA has been well in the lead, although this year, the much lower UK market valuations and higher dividend yields, seem to have attracted the attention of buyers and also there have been some UK takeovers by US businesses.
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