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black monday revisted economist suntribune january 20 1988 a9 many lessons to be learned rrsp by bay neuman if youre asked in the year 2000 where you were and what you were doing on mon oct 19 1987 the chances are good you will give a very precise answer on socalled black monday the dow jones industrial average plummeted 508 points ani lost 226 percent of its value almost twice the percentage drop of the crash of 29 the tse followed suit by tumb ling 62127 pointsorabout 173 per cent of its value on monday and tuesday of that week as people gathered around televisions radios and evening newspapers the talk was of an economic disas ter and the beginning of a possible new depression for north amer ica and the world yet the sun came up again the financial market system held together and investors learned that they would live to fight another day even now as financial markets continue to search for direction it is instructive to put black mon day into perspective as to its causes and its lessons for indi vidual investors one important fact often over looked is that the dow began its fiveyear bull run in aug 1982 at 777 points peaking in aug 1987 at 2722 more than a 250 percent gain the 226 percent oneday drop was unprecedented but repre sented only one eleventh of the fiveyear gain similarly the gain for the tse from its 1982 low to its august 1987 high was 2781 points or 208 the twoday decline in october therefore represented only onetwelfth of the five year gain this means many longterm investors retained substantial gains even after the tumultuous week of oct 19 markham executive optimistic a vicepresident with a mar- khambased company is advis ing consumers not to worry ab out last falls stock market crash arid its effect on the eco nomy predictions of a recession have been overdone according tonickmancini vicepresident strategic planning american express canada inc the economy will grow by 25 per cent in 1988 he said cit ing five factors which will sus tain economic growth the g7 countries have orchestrated the sharpest drop in shortterm interest rates in years and longterm rates are following suit this will lend considerable support to the con sumer durables industry mancini pointed out and 1988 is a presidential election year in the us which will undoubtedly help to keep those interest rates low he added mancini noted that employ ment and labor income are at alltime highs providing stimu lus for further growth next year this mitigates stock market losses which affect relatively small numbers of canadians he said mancini observed that the us administration also seems ready to assume fiscal lead ership and that financial mar kets will react positively to a combination of tax increases and spending reductions aimed at reducing the us deficit observers concerned with any action that appears to rein force recessionary pressures are assuming that looser monet ary policy will not offset what tighter fiscal policy takes away he said moreover a depreciated us dollar is stimulating the us economy the second lesson is how diffe rent 1987 is from 1929 today most economists discount the pos sibility of a rerun of the financial collapse that followed the 1929 crash the basic reasons are stronger and more alert central banks the separation of the banking system from the market system tougher restrictions on margin trading buying stocks on credit and the safety net of bank deposit and securities account insurance each is a result of lessons learned from 1929 the actual cause of black monday is more difficult to pin point most experts identify three key factors massive federal budget and trade deficits which have turned the us into the worlds largest debtor nation sophistication of global finan cial markets with computerized trading and new instruments such as stock index trading that increase market volatility investor psychology that trans lated the above factors and lack of action from washington dc into a panicked stampede as for the individual investor the lessons learned from oct 19 were many and sometimes pain ful on the most obvious level many learned the basic reality of the stock market what goes up may come down many firsttime investors had never experienced a significant loss even more investors learned the market can be a perilous place without expert advice clients of fullservice brokerage firms had investment executives backed by uptotheinstant information to help them make investment deci sions in a situation where time liter ally was money fullservice firms cleared client transactions as quickly as possible often sav ing several dollars a share in the falling market many other firms clearing time may have been lon ger since they had to go through third parties for their transac tions lastly individual investors learned firsthand the value of a diversified portfolio as recently as oct 12 many major firms re commended clients keep 25 per cent or more of their assets in cash or equivalents and a similar amount in fixed income bonds leaving less than half their funds in the stock market those who followed this advice had some solace on oct 19 looking ahead to 1988 you might wonder if there are any good values in todays markets the answer unquestionably is yes however more than ever financial success will depend on a clear understanding of invest ment goals advice from a qual ified investment executive and a diversified portfolio of invest ments ray neuman is an investment executive with mcleod young weir in markham 5 years guaranteed inviestlvlent certificate minimum deposit ssoo- 1sterest compounded assuall y to maturity rates subject to chasce wthoutxotke sorrspfees eatons second floor markville centre markham 4791922 financial centre open store hours df laurentian financial services offered by eaton trust company member canada deposit insurance corporation deadline for contributions february 29 1988 guaranteed wth a guarantytrust more money now because not only can you defer 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