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.
