This blog post was originally published on RealMoney on Oct. 15 at 12:24 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
There is a lot of talk today about the stock market crash that took place 20 years ago. It certainly is important to understand that the market can act so dramatically. Although the 1987 crash was of an almost unimaginable magnitude, it does illustrate that the potential for surprises is always lurking.
However, it is important not to learn the wrong lessons from the crash as well. I would bet that much more has been lost worrying that another giant one-day crash might occur than was actually lost in the 1987 crash. Fear of a crash has caused a lot of people to be overly cautious without must justification.
One of the most important things to remember about the 1987 crash is that it didn't occur when the market was near a high. The
had topped on Aug. 25, 1987, at 2722.
On Sept. 21, it was at 2492, which was a loss of 8.4%. The Dow then managed to bounce back up on mediocre volume, but didn't get close to its August high before it started to roll over again on Oct. 6. At that point, it started to downtrend in earnest, and the Friday before the crash it was already 17% off its high.
If you used any sort of money management system at all and set stops at reasonable levels, the great likelihood is that you would have been out of almost all your positions before the market crashed 23% on Monday, Oct. 19, 1987.
The lesson here is obvious. Use a money management system, and when stocks are downtrending, don't be too quick to try to catch the turning point. If you keep that in mind, not only would a 1987 crash not cause you too much pain, but it would present a huge opportunity if you stayed patient.
Don't let fear of a crash make you overly cautious. Just make sure you develop a system for cutting losses and stick to it.
James "Rev Shark" De Porre is the founder and CEO of Shark Asset Management, an SEC-registered investment advisory firm. He also operates
sharkinvesting.com, an interactive online community that serves and educates active investors. De Porre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children.Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback;
to send him an email.