October 29th is the anniversary of the big bang or the first big stock market crash, which was a large contributing factor to the great depression of the 30’s, and it begs the question, when is the next big stock market crash, and how can I prepare for it?
How bad was the crash of 1929? The following useful graph might help:
Amazing stuff, eh? I didn’t know about this period.
- There was a short recovery in January 1930, and then everything went down from there
- It took a long time to get back to 1929 levels
- There was still a great deal of market volume along the way too
What Can We Learn From This?
The Economic situation back then has about as much to do with today as it did with the great Tulip Bubble Burst. Some say the world is a very different place. Don’t get me wrong, this kind of catastrophic drop will happen, just that comparing 1929 to now is foolish, so many things are different, and not much can be learned from 1929 (other than, this can and will happen again). If you’d like PBS supplies this Useful Timeline Leading up to the Crash, if you think you can find any parallels there.
Is this another “fire and brimstone” rant about losing money? No, if you are an Index’er or Couch Potato I would give the same advice as I gave many months ago (and stole that advice from our friend Preet), Live With It and Don’t Look. You will most likely have to re-balance in a while, but do that when you usually would and go back to your regular life, is the only advice I could give.
If you “timed” the market right, good for you. It is most likely through blind luck, but good on you, if you dodge the “big one”, but it was luck (unless you are part of the inner sanctum of traders who knew it was coming, in which case you are most likely guilty of Insider Trading).
I will take the opposite view and say that there was a lot learned from the 1929 crash and that we should all be thankful that someone was paying attention in 2008.
In a nutshell, the great depression was brought on by a freezing of capital markets and protectionism created by the 1929 panic. The isolationist/protective stance amplified the effects of the downturn and cost many dearly.
We can be thankful that in 2008, the opposite occurred and governments added billions to the economy to keep the markets liquid and kept global trade moving.
That is the takeaway from the crash of 1929. We are currently half way through a 9-10 year dept recession and can look forward to clearer skies on the horizon.
I highly recommend “The Great Crash – 1929” by John Kenneth Galbraith as an interesting study of the event.
From a personal individual perspective, the crash of 1929 is a perfect example of how one’s portfolio should always have a portion devoted to fixed income to soften the impact of such events.
As with all downturns, there were a few people who benefited handsomely from the crash. The best example is an estate near Chicago which now holds massive fields of undeveloped lands. It was bought by a middle class family from a former “rich” family and that family now sits on tens of millions of dollars in real estate that they picked up for pennies on the dollar.
In 2008, the people holding on to insurance on the credit notes made a huge payday when the markets corrected. They had identified correctly that something was amiss. These weren’t wall street wolves but people who were affected by Asperger’s Syndrome , a mild form of autism. The person afflicted has the ability to go through thousands of pages of documents and keep the facts straight. It was a nice talent to have when analyzing prospectuses totalling thousands of pages.
In summary, while I agree that the details of the crash may not be have much correlation today, the macro aspects of the crash still remain relevant. A point that we both agree on.
cheers and have a great day. I enjoyed the article.
Thanks for the clarification, given the speed of news and such, the situation certainly would come upon us very quickly…
No matter how fast the news, I can never react to it in time. That is why I follow the advice that you and others have given many times. I ignore all financial news and stay away from my investments when the markets go south.
I rebalance during times of tranquility or when I have surplus cash that needs to be re-invested.
I stayed away from the rather sour September and October and I am glad that I did . Things are looking better now and I can look at my investments again.
Often times the simplest advice is the best. Keep reminding us of that fact. I still need the occasional reminder.
Imagine all those juicy buying opportunities post 1929 crash! I profited quite well after the 1987 crash & 2008-2009 recession. These days I’m mostly buy, hold & monitor with dividend growth stocks. I live by these great quotes:
“Slow & steady wins the race”
“It is not necessary to do extraordinary things to get extraordinary results.”
“Have patience – good investors do”
Well the fact there was a “recovery” in January 1930 followed by an even bigger drop, suggests there were profits made after the first crash, but I doubt it was by John Q. Public.