October 19 1987 is a day many investors will remember. Black Monday was the day when global stock markets crashed in spectacular fashion. Within a fortnight, shares in Hong Kong had almost halved in value. In the UK and the US, investors lost more than a quarter and a fifth of their investments, respectively.
The exact reasons for Black Monday are still unclear, but what matters are its lessons. For me, 1987 was characterised by an unhealthy interest in flotations. Many investors believed it was possible to make easy money by investing in newly floated companies one day and selling them quickly for a rapid profit, ignoring the importance of valuation. For instance, the flotation of retailer Sock Shop was 50 times oversubscribed and Tie Rack's 80 times.
A 20 per cent drop in your portfolio's value is never pleasant. But, the FTSE 100 recovered after Black Monday, ending the year some 2 per cent higher. What's more, today's stock market, at around 5,800 points, is 180 per cent higher than on Black Monday. This underlines the importance of focusing on the long term and of taking advantage of market falls to buy quality shares at reasonable prices.
There is a more important point about the recovery after Black Monday. The total return – from reinvesting dividends – has been astounding. Had you invested £1,000 in the UK stock market on 19 October 1987 and spent all your dividends your investment would be worth £2,800 today. But had you reinvested your dividends, it would be worth around £7,250. Put another way: shares can fall, dividends once paid are yours to keep.
If you were an investor during Black Monday, your portfolio's collapse could have been an awful. But, it is important to stay calm. Selling at the bottom is one of the worst things to do as it leaves another problem: choosing the right time to get back in. If you don't re-enter at the right time, or, worse still, don't get back in at all, you could end up losing twice.
Time and again it can be seen the best time to put your savings into shares is immediately after a crash. The crash of 2007 has been no different.
David Kuo is director of financial advice website fool.co.ukReuse content