Market crash of 1987: twenty-five years later
THIS year we celebrate the 25th anniversary of the stock market crash of October 1987. It seems like ancient history now, and its effects have been overshadowed by the rise and fall of the tech bubble, and the global financial crisis.
It was the largest one-day change in stock market history. The Dow Jones Industrial Average dropped 22.6% (or US $500 billion) while our own market plunged 500 points - or 25% - in a single trading session.
The crash followed a worldwide stock market boom. A five year bull market had got underway in 1982 in America, and was driven by strategies that became known as financial engineering. The trick was to buy a company with a lazy balance sheet, then strip out the cash and use it to expand by takeovers and mergers.
In Australia the banking system had just been deregulated and the banks fought each other for a chance to lend to the new breed of entrepreneurs. Fuelled by all the activity, our share market leapt from 600 points to 2300 points between 1983 and 1987.
Then in October 1987 the music stopped - and so did the lives of over geared companies like Qintex, Bond Corporation, Ariadne and Adsteam.
Even though the markets have had their ups and downs, long-term investors have still done well. If you had invested $100,000 in the All Ordinaries Accumulation Index in January 1987 you would now have $872,000 - a compound return of 8.7% per annum.
And despite all the doom and gloom in Europe it's been a good year to date .For the year to date the Australian market has returned 17% including dividends.
In the New Year we will discuss many other strategies that will enable you to build wealth in a tax effective way. In the meantime have a wonderful Christmas.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.