Last week was the 30th anniversary of Black Monday, October 19, 1987. On this day, the market dropped 23 percent in 24 hours. I remember the day, the week, and the year very well.
At the time of the market crash, I was four years into my new career and had recently left the security of working as an accountant to enter the emerging industry of financial planning. Stockbrokers had been around for hundreds of years in one form or another, but financial planning was still in the early stages of its inception.
Around the time of the financial planning industry’s debut, the International Board of Standards and Practices for Certified Financial Planners (IBCFP) introduced the official CFP® Certification Examination. I received my CFP certification in March 1990 and went on to establish a wealth management firm dedicated to helping clients build a proactive plan for their financial future.
As many of you already know, financial planning is the development, implementation and monitoring of a long-term financial strategy. Your financial planner should be prepared to navigate every potential roadblock, from the typical forced layoff, to an unprecedented event such as Black Monday.
Such occurrences can impact your long-term financial plan, especially when emotional reactions are involved. That’s why, as your financial advisor, it’s our job to assess the impact of such events on your financial future before they occur, and work with you to develop a plan that mitigates such risk. Our goal is to respond to such events in a composed, methodical fashion without allowing emotions to negatively impact your financial future.
Black Monday: From Willis’s Perspective
So, back to Black Monday, October 19, 1987.
The year had big run-ups in the market, which led to a 23 percent decline over a single day. However, the market had already fallen nearly 16 percent over the prior two months, resulting in a peak-to-trough decline of almost 40 percent. The surprise result is that the Dow ended up at a two percent return for the end of the year.
Riding out the events of 1987 without planning or making financial adjustments would not have had a major impact on the financial plans of a majority of individuals. However, selling when the market was as much as 34 percent down, could devastate a comfortable retirement or easily set one back five to ten years.
What Can We Learn From Black Monday?
In our current financial environment, I believe it’s critical to emphasize the following two points to our clients:
1. The development of a long-term investment plan is more important than ever
2. You should understand and designate which assets and portfolios will serve as your income source during retirement
If you are employed and do not expect to retire within the next three years, stay the course. On the other hand, if you plan to retire and commence utilizing your investments as an income source, it could be an opportune time to adjust your investment allocation.
As retirement looms on the horizon, it may be reasonable for you to consider reducing your stock/equity exposure. This is a perfect example as to why I strongly advocate meeting with your financial advisor every six months. During these sessions, your advisor is not always going to change the major plan, but they will work with you take advantage of the current market environment in a way that supports your financial goals.
If you’re retired and living on your investments, it’s necessary to establish a cash flow plan. This plan is usually made up of a combination of resources, i.e. Social Security, pensions, bonds, and dividend income along with stock market appreciation. In addition, it’s pertinent that you establish a short-term emergency fund and a cash reserve account to cover any living expenses during your retirement.
How Should Those in Retirement Take Advantage of the Current Stock Market High?
If you’re in the retirement stage of your financial journey, you should work with your advisor to capitalize on the current market rally. The most commonly employed financial strategies are:
Re-balance your portfolio:
For example, if our standard recommended stock/equity exposure is 65 percent and your portfolio has increased to 70 percent stock/equity, then it may be time to rebalance your portfolio. Generally, we would advise that you sell five percent of these investments.
Accelerate major purchases:
For example, if you plan to purchase a car in the next 18 months, sell a portion of your stocks/equities and set the money aside to fund the expense.
Overall, you should work with your financial advisor to implement and annually review a long-term financial plan. Rely on the facts, your long-term wealth management plan, and the knowledge of your financial consultant to guide your decisions.
We strongly recommend that you have a strategic discussion with your financial advisor before taking action. If you have any questions, feel free to reach out to the WJ&A team for more information or to schedule a meeting.
Willis Johnson, CFP®
President and CEO
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results. This information is not intended to be a substitute for specific individualized advice and should only be relied upon when coordinated with individual professional advice