In a matter of days the S&P 500 and FTSE 100 fell by more than 20 per cent, while the Hang Seng index fell by more than 40 per cent.
Performance of indices 1987-1990
Source: FE Analytics
Automated-trading is the most widely held explanation for the crash.
While the mass falls caused panic throughout the financial industry, markets stabilised quickly and most had made back their losses by early 1990.
With this in mind, Tom Stevenson (pictured), investment director at Fidelity, highlights some of the lessons he learned from the crash, and advises investors to take heed if the markets should fall sharply again. Keep calm and carry on
The FTSE 100 ended 1987 higher than it started and within two years the index had surpassed its pre-crash peak.
By the time investors have recovered their equilibrium, the moment to sell has very likely passed and by panicking at this stage they will simply miss out on the subsequent recovery.
Look through the market gyrations to what is happening in the real world
The 1987 crash was triggered by over-exuberance (the market had risen by nearly 40 per cent in the first nine months of 1987) and was then compounded by automated computer trading.
The underlying economy was sound at the time – hence the quick recovery.
Take a long-term view
The 1987 crash looks insignificant on a long-term chart today even though, at the time, it felt like the end of the world.
Be prepared for the worst and don’t put all your eggs in one basket
I was in Hong Kong at the time of the 1987 crash – the market there shut for a week, emphasising the point that emerging markets can sometimes be difficult to emerge from in an emergency.
Don’t try to time the market
When your emotions are running high you will make the wrong investment decisions because our brains are hard-wired to run from danger. The best investors do the reverse – they walk towards danger, albeit with their eyes wide open.
Invest regularly, a little at a time
This way, you will take advantage of market falls like the 1987 crash, picking up a few shares or units in a fund when they are cheap and even though your mind is telling you to put your money under the mattress.
Re-invest your dividends
The chart below shows the performance of the UK stock market since the 1987 crash – the lower line reflects just the capital growth while the second includes the compounded benefit of putting dividend income back to work in the market.
Performance of index since Oct 1987
Source: FE Analytics
Keep some of your powder dry
Crashes happen, and when they do you want to have some ammunition ready to take advantage.
It may be frustrating to have even a small proportion of your savings earning next to nothing in cash when shares are rising, but so too is being unable to capitalise on bargain-basement prices when periodically they appear.
Beware of buying high and selling low
Remember that the stock market is the only market in the world in which we prefer to buy when prices are high.
Think about how you would buy fruit and veg at a street market. You would behave in exactly the opposite way.
Watch costs but worry more about value
The difference between the charges on an actively managed fund and a tracker might be 1 per cent a year. If you back the right manager, however, that might be the best 1 per cent you ever invested.