Will The Stock Market Crash Again
Photo Credits: telegraph
Is a stock market crash a la 1929 Black Monday, Black Tuesday and Black Thursday brewing in the corridors of the Wall Street edifices? Or, the one that happened in 1987? What will happen if it indeed happens? Will a Great Depression follow in this case too?
Looking back, a fall of 22.6% in Dow Joes Industrial Average came about on Oct. 19, 1987. If a similar drop takes place now, Dow will show a reduced figure of 3,400 points. The recovery in the last instance took two years to come about but experts like Xavier Gabaix, the New York City University finance professor, feels that it cannot always be the same. For, the average years of recovery is calculated at 10 years.
The Plunge rates
Investment strategies cannot completely derail if you reduce the portfolio in stocks. This is especially so if you reckon you have only a decade or so to recoup the losses. Or, maybe if you lack the gumption to attempt a bail out after a crash. The calculations show that there will be a drop of 20% daily every 100 years, a drop of 15% every 50 years and a plunge of 10% every 13 years. The stock markets of Hong Kong, Japan and U.S. were taken into account to examine the trends. The reason why markets take a nosedive is simple. It is the very large investors who dominate the markets everywhere and if they decide to pull out at a given time altogether, the market has to crash.
Greener Pastures Elsewhere
Photo Credits: fumat2011
Circuit breakers or trading halts cannot provide succor to the markets because the investors who had taken out their shares will turn to other markets to sell. One avenue open to them domestically is the private electronic transaction method commonly called “Dark Pools”. Or, they may opt to head towards foreign markets. Is a permanent insulation possible for your portfolio to escape the effects of a crash? Yes, but only if you have short investment horizon. You also need to be stoic and do not waver away from the set strategies. For example, in the 1987 incident, those who went seeking greener pastures out of the country saw their stock value dwindling as much they did in the U.S. markets.
Choose from Alternatives
Is gold safe? Unfortunately, no. Campbell Harvey, a Duke University finance professor and a former TCW Group commodities manager, Claude Erb have discovered that gold took as much beating as did the S&P 500. Do U.S. Treasury bonds hold any hope? You must remember that the interest rates are very low and the bonds may not live up to your expectations.
A crash may leave short term bonds and money market funds well alone and they may be able to provide protection for the conservative investors. You may end up all bankrupt like Ranbir Kapoor's character in the Bollywood flick Anjaan Anjaani! A lesson learnt from the 1987 crash has made a large number of investors go in for 40% cash and short term bonds in the 26 years since then.
Sheila Kurdinger is working as a writer at ‘high cash offer’’. Other than writing she has interest in Mosei traveling, ID cracking and playing hockey. In past, she has worked as HR manager at AIE solutions, IEK marks and some others.
Posted by Cheaper Accountant. Posted In : Information