The S&P 500’s Worst Day Was 39 Years Ago Today. Should You Buy When Stocks Crash?

The S&P 500 (^GSPC -1.09%) had its worst day on record 39 years ago today. On Oct. 19, 1987, it lost 20.5% in one session to end at 224.84. The Dow Jones Industrial Average (^DJI -0.34%) had it even worse, dropping 22.6%.

A drop that big today would be brutal. From the S&P 500‘s close of 7,718.94 on Wednesday, Oct. 14, a 20.5% fall would knock around 1,580 points off the index in a day.

But for anyone who bought at the close that Monday, the crash worked out well. On price alone, the index grew around 34-fold from 224.84 to that Oct. 14 close. This turned $10,000 invested on Black Monday into around $343,000, without adding any dividends.

Dividends more than doubled the result

Yahoo’s S&P 500 total return index, which assumes every dividend is reinvested, just goes back to Jan. 4, 1988 — around 11 weeks after the crash.

For those early weeks, I took the index’s price change from the Black Monday close (a rise of about 14%) plus about 0.8% for dividends paid over that span, based on the index’s dividend yield then. From Jan. 4, 1988, on, I used the total return index itself.

Calculated that way, the $10,000 grew to around $776,000 by the Oct. 14 close. The annual return is about 11.8%, versus about 9.5% on price alone.

Put another way, reinvested dividends added about $433,000, more than doubling the final value. A yield of roughly 3.7%, where the index was when 1987 ended, likely never looks like much in one year. But over almost four decades, those payments compounded right alongside the stock prices.

These numbers do leave out fund fees and taxes. Index funds were around then (Vanguard started its first, today the Vanguard 500 Index Fund, in 1976), and their costs would’ve cut the result a little.

How much did buying on the worst day help?

The Black Monday close was about 33% under the index’s record close of 336.77, set on Aug. 25, 1987. Anyone who bought at the August peak, less than two months before, paid around 50% more for the same piece of the index.

The index traded at about 21 times earnings in August 1987, based on monthly averages. By November, after the crash, it was at around 14 times earnings.

Using the same method, $10,000 put in at the August high rose to about $519,000 with dividends reinvested. But the Black Monday buyer ended with around $257,000 more on the same $10,000.

In other words, buying at a lower valuation gave the Black Monday buyer a head start that never faded. Both buyers’ money compounded at the same rate from January 1988 on, so the head start stayed around the same size in percentage terms.

Still, the August buyer’s $10,000 rose about 52-fold. Most of the result came from owning the index for 39 years, not from the day the money went in.

Black Monday didn’t look like a bargain for weeks

Of course, no one knew at the close on Oct. 19 that it was a good time to buy. The index jumped around 5% the next day, then fell about 8% on Oct. 26.

And on Dec. 4, 1987, it closed at 223.92, just below the Black Monday close. Anyone who bought at 224.84 was underwater again around six weeks later.

Winning back the old high took longer. The index’s next close above that August 1987 record came on July 26, 1989, nearly two years after the peak. A year after Black Monday, though, it was already around 23% above the crash-day close.

Today’s Change

(-1.09%) -84.62

Index Level

7,659.44

Key Data Points

Day’s Range

7,631.77 – 7,756.84

52wk Range

6,316.91 – 7,844.52

What should index fund investors learn from the worst day on record? I don’t think it’s that crashes are worth waiting for. The August buyer paid the highest close of 1987 and still finished with around half a million dollars. Holding out for a 20% day might mean staying in cash for years, with no promise the price on the other side winds up any lower.

What Black Monday does show, I think, is that a steep fall has been a better time to buy than to sell. An August buyer who sold at the Black Monday close took a loss of around a third. But a buyer who put $10,000 in at that same close has about $776,000 to show for it.

For a long-term owner of an S&P 500 fund, I’d take a day like Oct. 19, 1987, as a reason to keep buying, perhaps in pieces, since the lowest close might not come on the first day. In 1987, it came around six weeks later, and by less than a point.