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CHAPTER 4

the United States was experiencing unprecedented economic growth. While the stock market, on the whole, soared to new record heights, there were some low points. Throughout the first six months of 1987, the market gained almost 30 percent. However, on October 19, 1987, the stock market suffered its worst crash to date. The Dow Jones Industrial Average dropped 508 points. That day a few new records were set: largest point drop, largest one-day volume of shares traded, and the largest percentage drop. The Dow dropped 23 percent, which was nearly double the previous record. Ten years later, on October 27, 1997, the market dropped precipitously again. This time, it fell 554 points, a new record. However, the percentage drop wasn’t as bad due to the value of the Dow at the time. It fell a mere 12 percent. However, within two weeks, the market had regained all its losses of October 27. (See Figure 4.1.) It took the market nearly two and a half years to recover from the October 19, 1987 crash.

This isn’t designed to scare you when it comes to investing in common stocks. It’s just a reminder of what can happen in the mar- ket. In the past decade, this country has seen such unbridled enthusi-

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2001 1973

Stock Market Returns 1960–2001

  • 30%

  • 20%

  • 10%

0%

10%

20%

30%

40%

Figure 4.1

Although most people remember the recent boom of the

stock market, this proves that the ability to predict what’s going to happen is unlikely. Note that both 1973 and 1974 had negative returns of roughly

  • 20 and –30 percent, respectively.1

1S&P 500 and American Express Funds literature.

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