It was 20 years ago today that the financial markets experienced Black Monday and by no means is this a call for celebration amongst the brokers and traders on the street. Black Monday is the name given to Monday, October 19th 1987, because on that day the Dow Jones Industrial Average (DJIA) dropped 508 points to 1739 which was an overall 22.6% loss. Similar enormous single day drops occurred across markets around the world. By the end of October 1987, the stock markets in Hong Kong had fallen by 45.8%, in Australia by 41.8%, in Spain by 31%, in the United Kingdom by 26.4%, in the United States by 22.68%, and in Canada by 22.5%. The 1987 crash has often been labeled as black swan event because there is an unprecedented degree of mystery associated with the mass panic leading to the sell-off. Whereas the markets expereiencd similar drops preceeding the outbreak of World War I and on the first day of trading following the terrorist attacks on September 11, 2001, no specific global event was seen to have triggered the imbalances and disruption witnessed on October 19th 1987. Commonly attributed factors to the 1987 crash were the rise to prevelance of computer-aided program trading, market overvaluation, financial illiquidity, and overall market psychology that was cognizant of an impending collapse. Many economists theorized the speculative boom and overvaluation leading up to the crash was caused by program trading (which is a computerized form of arbitrage trading), while others argued that the crash was merely a return to true valuation.

At time of writing, the Dow is currently down over 360 points (2.64%), however the markets have been on a rush skyward again, partially due to market overvaluation. The economic indicators are not aligning with the current prices on the street and it’s only logical that the market will see this sort of volatility as a stabalizing factor. Oil futures fell Friday, retreating from an earlier new record above $90, and many investors sold out to lock in profits which would definitely have an impact on the markets downward movement seen today. Other factors attributed to today’s losses include credit concerns, lackluster corporate earnings and an unstable housing market.

So, what is the average investor to do in situations such as the present? To begin with, if you have followed an investment plan and allocated a majority percentage of your portfolio to long term, blue chips, a smaller percentage to emerging and potentially volatile stocks and the smallest to highly volatile, your best bet is to hold your positions at the moment. Unless a company you are holding stock in has really been impacted by earnings reports or other indicators, now is the time to play it safe and hold until the market rebounds in the near future. There’s no doubt the losses today will be gained back within the next few weeks or month, so as the old saying goes, “Buy low and sell high”. Now is a good time to add some of those blue chips to your portfolio.