A week before the 1987 stock market crash I had all of my investment money in Twentieth Century Ultra, an aggressive stock fund that has since been renamed American Century Ultra (symbol TWCUX). That included money to pay for my stepson’s college starting in less than a year. But I escaped from the ensuing market meltdown unscathed. And I learned some important lessons from the crash and its aftermath.
I started investing in 1982, and for five years, the market did virtually nothing but go up—just as it has for the past 8 ½ years. It was easy for me to put a little money from every paycheck into a mutual fund. But I was a nervous investor so I subscribed to two market timing newsletters and periodically trimmed my stock holdings and then bought back into the market based on the newsletters’ advice. Sometimes the timing calls were good; other times, not so much.
The market gained a stunning 44% in 1987 through August 25 before turning down. Price-earnings ratios were inflated, as they are today. More worrisome, the Federal Reserve had recently pushed the Federal Funds rate up from 6% to 7.25% and the 10-year Treasury yielded 10%, up from 7% at the start of the year. Those rates sound ridiculously high today, but they were commonplace in the late 1970s and the 1980s.