Börse Express – 1929, 1987 and 2008: 3 impressive crashes and what we can learn from them

Shareholders fear nothing more than a sudden and severe crash. It can take many years for the market to recover from a slump. But how do we best behave in these situations and we can prepare for it? Here are three crash examples.

1) 1929 – The great economic crisis

In 1929, the biggest crash in stock market history so far took place. The Dow Jones index fell from 381 to 41 points within three years, which was a drop of more than 89%. Many people lost their jobs.

Speculators who are not up sharesPay attention to valuations, previously bet on ever increasing prices. They invested partly with borrowed money, which means nothing more than a leveraged trade, and therefore lost everything as a result of the decline or were even in debt in the end.

Economic performance and the stock market had completely decoupled from each other before the crash, as was the case, for example, in 2000. By 1925, the American Federal Reserve had cut its interest rates below 3%, which, similar to today, led to a very sharp rise in the stock market. But precisely when prices were rising, more and more people were investing in the stock market. This has not changed until today.

2) 1987 – Black Monday

In 1987 the stock market had risen many years earlier. Furthermore, so-called portfolio hedges via futures were found en masse, which contributed to a quick crash due to computer trading. Corporate takeovers on credit became more numerous in the run-up, which drove the market further.

In addition, the US trade deficit skyrocketed from 1981 to 1987, weakening the US dollar and prompting the central bank to raise interest rates. As a result, bonds were suddenly cheaper than stocks. The last straw came on October 19, 1987, when the US attacked Iran, which led many people to suspect that war would break out.

The Dow Jones lost 22.6% within one day and a total of 36% to the low.

3) 2008 – the financial crisis

In the run-up to the 2008 crash, strong market deregulation was carried out, which resulted in even destitute people buying a house on a cheap loan and running into high debt. American banks saw the disaster coming and sold these loans as safe investments all over the world.

As long as house prices continued to rise, no one was harmed. However, when they began to fall, the system collapsed, resulting in an almost complete financial system collapse. The Dow Jones fell 54% overall.

What we can learn from it

History shows us that it is better not to buy stocks on credit or leveraged stocks. As 1987 showed, reacting to a crash is sometimes hardly possible. Even the most sophisticated strategies fail in this situation.

On the other hand, those investors who avoided stocks with a high valuation and therefore sold in the rise could consider themselves lucky. They built up cash that they could use to buy shares in the event of a collapse (when valuations fell again).

In addition, by buying undervalued stocks, our own portfolio loses less than the overall market in a crash and recovers more quickly in the period that follows. Warren Buffett has been doing this for many decades.

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