Black Monday, and the long view

Introduction

0:04HouseholdWhat happens to our money when the market crashes?

0:08To answer that, this film looks at why markets fall, how long they have taken to recover, and how to test a mix against a crash, before one comes. It starts on a Monday, in 1987. On Monday, the nineteenth of October, 1987, the Dow Jones Industrial Average, thirty of America’s largest companies, fell 508 points.

0:33That was twenty-two point six per cent, in a single day: still its largest fall in one day. Around the world, markets fell with it, from London to Hong Kong. Yet by the end of 1987, the S&P 500, a wider index of five hundred companies, was slightly higher than at the start of the year. And less than two years later, it passed its old high.

1:02A fall like that is frightening. It is also a normal part of owning shares. I’m Freya, Finna’s AI chief of staff.

One Monday

1:13What happened that day? Prices had risen fast that year, faster than company profits, and interest rates were rising. In the week before, the S&P 500 had already fallen about nine per cent. On the Monday, computers at large funds sold automatically as prices fell, a strategy called portfolio insurance, and every sale pushed prices lower.

1:39Orders came in faster than the exchanges could handle them. The next morning, before the markets opened, the Federal Reserve, America’s central bank, said it stood ready, in its words, to serve as a source of liquidity. Afterwards, the exchanges added circuit breakers: pauses in trading when prices fall very fast.

2:05Two words from this chapter. An index: a measure of a group of shares, such as the Dow’s thirty, or the S&P 500’s five hundred. And a circuit breaker: a pause in trading, when prices fall very fast.

Why markets fall

2:22A share is a small part of a company, and its price is a guess about the future. Prices move every day, as buyers and sellers change their minds about what lies ahead: profits, interest rates, the economy. Here are two investments, each earning six per cent a year on average, and ending in the same place.

2:44One rises steadily. The other bumps up and down on the way. Those bumps are volatility. Shares have more of it than bonds or cash: it comes with their higher growth over the long run. Falls are a normal part of owning shares. From 1980 to 2025, the S&P 500 fell by fourteen per cent on average at some point in the year, yet it ended higher in thirty-five of those forty-six years.

3:17And no one can reliably time them. From 2005 to 2024, ten thousand dollars left in the S&P 500 grew to about seventy-two thousand. Missing only its ten best days, it grew to about thirty-three thousand. Seven of those ten best days came within two weeks of the ten worst.

3:41One word from this chapter. Volatility: how much, and how fast, prices move up and down.

How long recoveries take

3:51A fall is measured twice: how deep it goes, and how long it lasts. A fall from a high to a low is called a drawdown. Institutional investors, such as pension funds and endowments, follow it on a chart like this one: each month, how far the money stands below its last high.

4:12The line at the top is the high. Everything below it is time under water. This is the S&P 500, with its dividends, at each month’s end, from 1996 to 2025. After 2000, it fell forty-five per cent, and stayed under water for seventy-four months: more than six years. After 2007, it fell fifty-one per cent: the deepest fall of the thirty years.

4:40In 2020, twenty per cent, and back in seven months. In 2022, twenty-four per cent, and twenty-four months. The Mix lab reads every fall the same way, as a portfolio report does. How deep: from October 2007 to February 2009, fifty-one per cent. How long it fell: sixteen months.

5:08How long it took to climb back to the old high: thirty-seven months, to March 2012. And the months under water, from the old high until the money was back at it: fifty-three, more than four years. Further back, the S&P 500’s high of 1987 was passed again in under two years. But after 1929, the Dow’s price did not pass its old high until 1954: twenty-five years.

5:39Counting the dividends paid on the way, and the fall in prices in the 1930s, someone who bought at the 1929 high was even again by late 1936: about seven years. The Mix lab counts the dividends too. While prices are down, a loss is only on paper. Selling after a fall makes it final.

6:04A recovery only lifts what is still invested. Two words from this chapter. A drawdown: a fall from a high to a low, measured in per cent. And months under water: from the high before a fall, until the money is back at that high.

The ride you choose

6:24How much a fall hurts depends on the mix. Before a fall, institutional investors run a stress test: they replay a bad year on the mix they hold, or plan to hold, to see what it would have done. Here is 2008, replayed on three mixes, each put back to its weights every January.

6:45All in shares, the money fell thirty-seven per cent that year. From its high in 2007, it spent fifty-three months under water. Sixty in shares and forty in bonds: twenty per cent, and thirty-eight months. Forty in shares and sixty in bonds: twelve per cent, and twenty-five months. Less in shares meant smaller falls, and less growth: from 1996 to 2025, about ten per cent a year all in shares, eight for sixty-forty, and seven for forty-sixty.

7:22And a stress test replays more than one year. For the forty-sixty mix, the worst of the thirty was not 2008, but 2022, when bonds fell too. A family can choose its mix before a fall, on a calm day: a target for each kind of investment, and a range around it. Take the Johnsens, an example household.

7:47Their policy sets fifty-five per cent in listed shares, in a range from forty-five to sixty. Replay 2008 on their mix, and listed shares end the year at forty-four per cent of the whole: under the floor. Bringing the mix back to its targets is called rebalancing: selling some of what held up, and buying some of what fell.

8:12Three words from this chapter. An asset mix: how a family’s money is split between shares, bonds, cash and the rest. A stress test: replaying a bad year on a mix, to see what it would have done. And rebalancing: moving the mix back towards its targets.

In a family’s office

8:35A family office tests its mix, and writes down what it will do in a fall, before the fall. In Finna, the Mix lab runs the same test on a family’s own mix. It replays the Johnsens’ policy on thirty years of history, month by month: its worst year, 2008, its deepest fall, and its months under water. Move listed shares up to eighty per cent, and the rest make room.

9:04Every number moves with it: 2008 takes thirty per cent, and the months under water grow to forty-two. Nothing you try is saved, and none of it is a forecast. The Johnsens’ rules live in Governance. After a fall, Drift shows which part of the mix is outside its range, and why it moved there.

9:29What to do about it stays the family’s decision. A household can do the same, at its own size. It chooses its mix on a calm day, and tests it against a year like 2008, not in the middle of a fall. It writes down a range for each part.

9:49It keeps enough cash for the months ahead, so it never has to sell shares at a low. It decides in advance when it will rebalance. And it measures its shares in years and decades, not in days. One word from this chapter. A cash reserve: money kept in cash for the months ahead, so nothing has to be sold at a bad time.

In short

10:17So, in short. Large falls are a normal part of owning shares, and no one can reliably time them. A fall is read by how deep it goes, and how many months it stays under water. Selling after a fall makes the loss final. And a stress test, run on a calm day, shows how much a mix might hurt, before the fall.

10:41In Finna, the Core portfolio path takes this further: twelve quests in four short stages, then a test. You’ll find Finna at finnafamilyoffice.com. Ready when you are.