With the 25th anniversary of the Oct. 19, 1987, stock market crash upon us, we must beware of another huge plunge, says MarketWatch columnist Mark Hulbert.
Research from New York University finance professor Xavier Gabaix and three scientists from Boston University in 2005 points to periodic crashes like the Dow’s 23 percent wipeout in 1987, Hulbert writes.
“The researchers derived a complex mathematical formula for predicting the frequency of large daily stock market movements And they found that not only does the U.S. stock market over the last century closely adhere to the formula, so do international markets.”
Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation
And follow-up studies only strengthen the original findings, Gabaix tells Hulbert.
Hulbert doesn’t mention anything about what the actual frequency of crashes is. But theoretically we could be hit with a major plunge anytime.
Gabaix tells Hulbert that the best strategy for investors to follow knowing that a crash will come at some point is to reduce risk in their portfolios.
The problem, of course, is that reducing risk means reducing rewards, which investors are reluctant to do when the market has soared for three years.
Before the 2008-09 financial catastrophe, many economists warned of a credit bubble. But few investments, such as Treasurys, would have saved investors from losses when financial markets tumbled.
While Hulbert warns of tragedy, many experts see stocks continuing their recent rise. Byron Wien, vice chairman of Blackstone, tells CNBC that the Standard & Poor’s 500 Index will likely hit 1,500 by year-end, boosted by a strengthening economy.
Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation
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