Read about it in Could you stomach a 2,600 point drop in the Dow?:
"Anyone younger than their mid-40s probably doesn’t remember what happened 24 years ago today, since they were not yet out of college. This includes most mutual fund managers, by the way. But they should nevertheless study what happened on October 19, 1987 — a day that came to be known as Black Monday.
The Dow Jones Industrial Average INDU that day dropped 508 points, which at first blush might not seem all that noteworthy. After all, the Dow on a couple of occasions in recent months dropped at least that much.
But the Dow was a lot lower in 1987, which meant that the 508-point drop that day was far bigger in percentage terms—22.6%, in fact.
If a similarly-sized plunge were to occur at today’s lofty levels, the Dow would drop more than 2,600 points.
Such an extraordinary plunge may strike you as most unlikely, and you’d be right. But we’re kidding ourselves if we think that another drop of that magnitude won’t happen again.
In fact, according to a fascinating body of research (championed in large part by Xavier Gabaix, a finance professor at New York University) plunges as big as 1987’s Black Monday—while rare—are an inherent part of the investment landscape.
Gabaix discovered that the frequency with which huge plunges occur follows a well-known tendency known as Zipf’s Law. A crash like 1987’s, for example, will occur once very 75 years or so, on average.
Because this is an average frequency over many years, Zipf’s Law doesn’t tell us when the next crash will occur. But it does mean that we need to arrange our financial affairs on the assumption that another one, some day, will take place."
According to Zipf's law, whatever that is, that means watch out for another debacle in 51 years or so. I plan to miss the circa 2062 event, since I saw the one in 1987 up close and personal.
Thanks. Bob.
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