On 19 October 1987, the FTSE 100 plummeted 10.8% — a day that became known as Black Monday. In the US, the Dow Jones fell 22.6%. It’s often forgotten that on this side of the Atlantic, the market was down even more (12.2%) the following day.
I was at school so I didn’t experience the panic that investors must have faced at the time. This dramatic period came three years after the privatisation of BT, an event that kick started an era of wider share ownership.
Courage and conviction
But those brave enough to have invested during these tumultuous events would now be sitting on a healthy gain.
At close of business on Black Monday, the FTSE 100 had a value of 2,052. It’s now around 7,675. That’s an increase of 274%, meaning £1,000 invested then would now be worth £3,740.
Not a bad return considering we have experienced a global financial crisis, the dotcom crash, Brexit, a pandemic, a war in Ukraine, and three recessions, during this period.
Keep on buying
But by reinvesting dividends it would have been possible to achieve an even bigger return.
According to IG, adopting this approach would have delivered growth of 7.4% a year between 1984 and 2022. A lump sum of £1,000, invested in October 1987, would now be worth a much more impressive £14,033.
The power of using dividends to buy more shares is illustrated in research undertaken by Schroders. From 1 January 2000 to 14 December 2018, the FTSE 100 fell just over 1%. But during this period, dividends returned 93.5% — equivalent to an average of 3.5% a year.
Although dividends are never guaranteed, the past tells me that the UK’s largest listed companies have a good track record of making reasonable cash returns to shareholders.
The other lesson to be learned from the history of the Footsie is that investing should focus on the long term. This helps mitigate against the risk of market volatility.
Constantly buying and selling stocks is trading, not investing. If the correct shares are chosen, the gains will be higher. But there’s also the possibility of incurring some big losses by adopting a short-term approach.
Investing for a second income
For most people, there comes a point in their lives when they could do with a bit more income. That’s usually in retirement, when an individual’s career has come to an end.
According to AJ Bell, the FTSE 100 is currently yielding 3.9%.
I could therefore earn passive income of £547 a year, from a sum of £14,033.
By taking a long-term view in 1987, 36 years later it would have been possible to generate an annual income equivalent to more than 50% of the initial amount invested.
I don’t think many people would have thought that possible in October 1987, when they were assessing the damage inflicted on their portfolios by the Black Monday sell-off.