On the graph above, you can see Black Monday shown between the two red dots. It looks rather insignificant when viewed in context of an entire ten years.
If you invested just before Black Monday, watched your funds go down, but chose to remain invested and ride it out, by the end of 1996, your investments would have grown at an 8.5% annualized return. This means for every $1,000 you invested, it would have grown to $2,260 over ten years.
If you were a bit luckier, and invested just after Black Monday (buying low), you realized an 11.6% annualized return. At 11.6%, for every $1,000 you invested, it would have grown to $2,996 over ten years.
As a long term investor, you were able to earn a respectable rate of return over ten years regardless of whether you invested at a short term market high, or a bear market low. The only investors who experienced significant losses were those who bought high, panicked, and sold during the bear market.
Black Monday had little effect on investor's long term stock market returns, unless they panicked. Financial advisors encourage a buy and hold perspective, because they know average investors earn below average returns by buying high and selling low.
Once the market has dropped, the most likely way for your investments to recover their value is to stay invested. That is because those who sell typically wait on the sidelines far too long, until the market goes up, then buy back in, thus missing out on much of the gains that occur when the stock market recovers from a bear market.
In the next few charts, we’ll examine another trying time for investors: the bear market of 2002.
