Why You Should Root For a 1987-Style Dow Crash

1987 was scary, but most of the doomsayers ignore what happened next.

Apr 4, 2014 at 4:30PM

Those who ignore history might well be doomed to repeat it. But recent calls that the Dow Jones Industrials (DJINDICES:^DJI) might be setting up for a repeat of the Crash of 1987 should actually make you hopeful that this happens -- because even if it brings short-term pain, those who actually went through the 1987 Crash will also remember the quick rebound and huge long-term returns that followed.

Obsessed with the next bear market
Over the past few months, analysts have been working hard to predict when the long-awaited drop in the stock market will come. Back in February, the in-vogue theory involved comparisons to the Crash of 1929, which ended the bull market of the 1920s and led to the Great Depression.

Photo credit Wikimedia Commons, Jean-Pierre Lavoie.

But now, Wells Capital's Jim Paulsen has compared the current market to the bull run of the 1980s. Paulsen noted that if you assume that the current market will last exactly as long as the one that began in 1982 and ended with the Crash of 1987, then the Dow should turn downward on May 27.

Admittedly, there are some similarities. Paulsen pointed to the roughly 175% gain that the broader market has posted since 2009, which matches the gain in stocks from 1982 to 1987. But even Paulsen acknowledged that the potential for a full-blown crash isn't all that high, with a milder decline more probable. Still, because of Paulsen's prominence, popular news sources are grabbing on to the story, sowing fear among those who don't know all of the history of the 1987 Crash and its aftermath.

What came next
What many younger investors fail to realize is that, as scary as it was, the Crash of 1987 was a short-lived drop by historical standards. At the worst point after the crash, the Dow only fell as low as it had traded in early 1986 -- giving up less than two years' worth of gains.

More importantly, it only took the Dow until summer 1989 to regain all of the ground lost during the Crash of 1987. From there, the stock market set itself up for the even more impressive positive move of the 1990s, in which the Dow soared well above the 10,000 level and made countless investors huge sums of money.

After the gains we've seen in the stock market over the past five years, many smart investors would jump at the chance to get better values on their favorite stocks. Unlike the tech bust of the early 2000s, the 1987 Crash involved wholesale selling of even blue-chip names, and value investors who have been frustrated by high valuations would undoubtedly take full advantage of that situation to get a bargain on the stocks on their watchlists.

Don't be fearful -- be greedy
In hindsight, the aftermath of the Crash of 1987 gave investors a large-scale buying opportunity the size of which investors didn't see again for more than 20 years, when the market meltdown in 2008-2009 sent stocks to similarly attractive lows. Especially for those with cash on the sidelines, a repeat of the 1987 Crash couldn't come at a better time -- as long as you have the courage to buy stocks that could survive its fallout and thrive in the long run.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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