On 20 September 1873, a wave of concern swept through the streets of New York City. Banks were forced to close their doors, share prices fell considerably, and the New York Stock Exchange made the unprecedented decision to halt trading for 10 days – its first-ever closure in history.
This event, known as the “Panic of 1873”, was caused by a combination of overconfidence, speculation, war, and poor financial decisions.
For a time, volatility must have seemed like the new normal. Even when the initial panic passed, it marked the beginning of what has now been called the “first Great Depression” in Europe and North America, which lasted until around 1877.
Despite this, markets eventually rebounded, and economies around the world recovered. Indeed, history often shows us this is the case following periods of financial instability.
With this in mind, continue reading to discover what financial panics of the past can teach you about modern investing.
Throughout history, several market crashes have been detrimental to investors
The Panic of 1873 was far from an isolated event. Throughout history, economic bubbles and subsequent crashes have occurred countless times, often with consequences for investors and the broader economy.
One of the more infamous examples of this is “Tulip Mania” in the Netherlands during the 17th century.
At the time, tulips were in incredibly high demand, with Investopedia revealing that some of the best bulbs were sold for what would be the equivalent of over $1 million in today’s money due to speculation.
Of course, the tulip market eventually collapsed when buyers could no longer afford the inflated prices. This sudden burst left many investors bankrupt, serving as a reminder of the dangers of speculative bubbles.
A century later, the UK experienced the “South Sea Bubble”, where the British South Sea Company promised vast profits from trading in South America.
Eager to make some quick money, investors were encouraged by assurances of “guaranteed” returns of up to 100%, and even prominent figures such as Sir Isaac Newton invested in the company.
However, due to the company’s limited trading opportunities, the promises of returns were unfounded. When the bubble eventually burst, many investors – including Newton, who Historic UK reveals lost an amount equivalent to £40 million in today’s money – faced significant losses.
History has shown that markets often recover, sometimes soon after a decline
While these crashes did have a considerable effect on markets, it’s important to remember that markets have shown that they often recover over time.
Volatility is an inherent part of investing, and while it can be unsettling, a long-term perspective can help you avoid panic during short-term downturns, which are often followed by periods of recovery.
In August 2024, markets in the US and UK experienced some volatility. Between 31 July 2024 and 5 August, Google Finance reveals that:
- The S&P 500 fell from 5,522 points to 5,186
- The FTSE 100 fell from 8,368 points to 8,008.
While both indices did fall, they quickly rebounded, with the Guardian reporting that the S&P 500 saw its largest single-day increase in two years shortly after the decline.
An even more stark example comes from Japan. On 5 August 2024, the Nikkei 225 stock market index saw its largest single-day decline in 37 years, losing 12.4% in one trading session. Despite this, the index rebounded by 10.7% the very next day, the Associated Press reveals.
It’s impossible to accurately predict how markets might perform, so it’s important to remain calm during periods of uncertainty and, if you need reassurance, consult your financial planner.
Your planner can act as an impartial sounding board, giving you the confidence you need to trust in your financial plan and refrain from making any unnecessary changes to your portfolio.
Following the crowd could also hinder the performance of your portfolio
Another important lesson from past financial crises is the danger of a behavioural bias known as “herd mentality”.
In fact, many of history’s market crashes were exacerbated by investors’ tendency to follow the crowd, partly driven by a “fear of missing out” (FOMO).
When everyone else seems to be investing in a particular company or asset, you may feel pressured to do the same, even if the decision doesn’t align with your own goals and circumstances.
However, blindly following the crowd could affect the value of your portfolio and hamper your progress towards your long-term goals. This was the case with Tulip Mania and the South Sea Company; when these bubbles eventually burst, many people faced considerable losses.
To avoid making these same mistakes, it’s vital to base any investment decisions on careful research and an understanding of your own goals.
Just because an asset is popular or appears to be performing well in the short term doesn’t necessarily mean it’s the right choice for you.
By taking a step back and reviewing the facts, you can establish whether an investment is right for you, potentially avoiding the pitfalls of herd mentality.
Get in touch
We can help you remain calm during periods of market downturn, ensuring that you focus on your long-term goals rather than short-term volatility.
Please call 01992 500261 or fill in our online contact form to organise a meeting and we’ll be in touch.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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