Bob Toomey

Bob Toomey

Lessons in long-term planning from an anniversary

A column from a financial adviser.

  • Monday, November 11, 2019 2:47pm
  • Business

By Bob Toomey

Special to the Reporter

In October, our firm marked its 32nd anniversary in business. We opened our doors on an interesting day, Monday. Oct. 19, 1987.

We often get a chuckle from clients when we tell them this because that day is referred to as “Black Monday,” a day in which the stock market plunged about 23 percent, the largest one-day percent decline in the stock market’s history.

There were multiple reasons for this single day decline, some fundamental, some technical; but regardless of the reasons, that low (actually the intraday low the next day, Tuesday) marked the bottom of a bear market after which the market proceeded upward on a bull tear that lasted for 12 years. One could say this was not a propitious day to open an investment firm; but that does not appear to have been the case as we’ve grown successfully since then and weathered many other “ups and downs” in the financial markets.

Our “anniversary” offers some interesting lessons and perspective for investing and financial planning. As was the case on that day in 1987, markets (and investors) can and do overreact to short term news and information. Two key “fundamental” concerns that contributed to Black Monday were a weakening dollar and Federal Reserve rate increases.

Many were concerned this would lead to a recession. Over the ensuing months, it became clear there was no recession coming, calmer heads prevailed and the market went on to stage a stunning recovery. The lesson here is don’t overreact to short term news or trading “events” but rather remain focused on longer term fundamentals.

Another lesson to be learned is markets can and will recover. Over the years, there have been hundreds of material (greater than 10 percent) declines in the stock market and the market has recovered every time to go on to new highs (we’ve had three new all-time highs this year alone).

As a corollary, another lesson to be learned is trying to time the market is difficult if not impossible. Many investors bailed out following the ‘87 crash. It was the worst mistake they could make as many failed to get back in due to fear, and instead, tried to “time” their entry back into stocks. As a result, they missed a significant recovery over the next few years and significantly impaired the long-term returns on their investments.

Finally, I think the most important lesson to be learned from this event is the importance of remaining disciplined and sticking to a long-term investment plan. A sound investment plan, in conjunction with a financial plan, can reduce risk by diversifying a portfolio across several asset classes and improve returns by avoiding market timing.

Just as adhering to a disciplined business strategy for 32 years has allowed our firm to prosper over the long term, disciplined investing and investment planning can and should provide a higher probability of success in achieving one’s investment goals over the long term.

Bob Toomey, CFA/CFP, is vice president of research at S.R. Schill & Associates on Mercer Island.

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