A Perspective On Stock Market Catastrophes

Peak to trough, what is the biggest stock market crash?  My friend and associate Terry Windrem, posed that question recently.  The answer is troubling.

I thought the New York Stock Exchange crash in 1929 would be a winner or maybe Japan in the early ’90s.  Not even close.  I did however find an interesting chart in this article Biggest stock market crash.

PF-crashes-1_3031400b

The article deals with British and American markets only.  I had forgotten about the south sea crisis and confess the Latin American crisis is new to me.

I think down 80% or so qualifies as a catastrophic crash.  Japan is interesting because it took so long to reach the trough at down 80%.  14 years to 2003.  11 years later, it is not yet clear that it is moving back.  How debilitating would that be for an investor?

But the record, the one Terry had discovered?  Cyprus.  Peak to trough is down 98%+.  5500 in 2007 becoming 99 by 2013 is a serious beating.  For each 100 Euros you put in, you got back 1.8 and if you put that in the bank because you sold at 99, you lost more when the government trimmed 40% from the bank accounts a week or so later.  100 Euros becomes 1 Euro is too big to be called a loss or a crash.  We need a new word.  Titanic comes to mind.  Maybe Krakatoa.  Biblical proportions.

The people who lived here through the 1930’s lost only 80% at most, but were never again comfortable investing in anything but gilt edged securities.  My grandfather would not even consider a provincial bond, and a bank certificate was worthy of a derisive scoff.  People remember hard times a long time.

Some people are resilient.  Iceland lost 95% in their markets but seem poised to recover.  They likely hold the largest single day down record.  Minus 77% when markets reopened after a 3-day holiday.  A fine time to have owned some put options.

Russia is another to watch now. In $US, from May to December 2008 it fell 78% and then recovered 90% of that loss by April 2011.  Since then, it has fallen 66% and shows no sign of arresting its decline.  On this one, currency exchange rates are important to notice. Be wary of this kind of gain/loss possibility.
I would like to think that such devastation cannot occur here and now, but I have lived long enough to learn that there is very little that cannot happen.

There some easy defences to the risk.

  1. Be aware of the possibilities
  2. Be aware of the effects on you personally
  3. Be vigilant.  Check 6 as the fighter pilots say.
  4. Be studiously objective
  5. Be somewhere else if you can
  6. Learn about tools to protect yourself.  Like options or guarantees in segregated funds.

And most importantly, act on what you learn.  It is not wise to panic, but when it comes a time that you must panic, panic first.

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com  

This entry was posted in Personal Finance and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s