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90 Years After Black Tuesday, What Are The Lessons For Today's Investors?

DAVID GREENE, HOST:

The stock market is not the economy. We should say that. But there are moments when a dramatic drop in the market signals a deep crisis, and that was the case on this day in 1929. In what became known as Black Tuesday, stocks lost 12% of their value in a single day. A leading economist of the time, Irving Fisher, offered reassurance to a nervous nation.

(SOUNDBITE OF ARCHIVED RECORDING)

IRVING FISHER: This country is fundamentally sound. At any rate, it now looks as though the bottom of the market had been found and many are taking advantage of the opportunity to come back and invest again.

GREENE: But, in fact, the market was a long way from the bottom. It lost another 84% of its value over three painful years. The Great Depression was on. Jason Zweig is The Wall Street Journal's personal finance columnist, and he sees some parallels between that time and the current market. And he joins us on the line from our studios in New York. Good morning, Jason.

JASON ZWEIG: Hi, David. How are you?

GREENE: I'm good. Thank you for coming on. Why do you see parallels here? What about the current market reminds you of the landscape in 1929?

ZWEIG: Well, I think the main distinction between now and then is that people aren't as enthusiastic about the stock market today as they were in 1929. But we do have some complacency at work. And there are a lot of investors who, after their money has, I would say, more than quadrupled in the past decade, may be feeling that something like that can never happen again. And while I certainly wouldn't expect the market to go down 89% in three years from here, we have had serious declines in the past short of that. And it wouldn't surprise me if we had another big decline again.

GREENE: So how does complacency - which is, you know, an emotion - transform into actions that could make us more vulnerable when it comes to the economics of this?

ZWEIG: Well, people who underestimate the probability of a severe decline can leave themselves dangerously exposed to the consequences. If you don't take seriously the possibility of losing a lot of money, then you're likely to make your portfolio riskier than it needs to be. And then when a bad market does come, you will overreact and sell out at the worst possible time.

GREENE: So, I mean, you are a personal finance columnist. For people who are involved in the market but also people who are not, are there things we can be doing today that would be the opposite of complacent, which would be - you know, being more active to protect ourselves from something like this?

ZWEIG: Well, absolutely. I think the single most important thing people need to do is diversify. And you should do that in two dimensions. You should do it in space, and you should do it in time. To diversify in space, you own not just pretty much all U.S. stocks, but you would own foreign stocks as well, and you would own bonds, real estate and other assets. And to diversify in time, you would invest gradually whenever you have the spare cash - ideally, once a month - over the course of time. And those two things will mitigate the effects of any severe drop in the U.S. stock market.

GREENE: What are you looking for in terms of market fluctuations and whether or not we need to be super freaked out that we could see another depression, or whether we actually could feel like, OK, this is not the end of the world?

ZWEIG: Well, I think a decline of 80% or more in three years is highly unlikely, David. But people should remember it was less than 10 years ago that - it was 10 years ago that the stock market lost half its value in 18 months. So people should always be prepared for a severe market decline because if you hope for the best but expect the worst, you'll have a good general attitude as a long-term investor.

GREENE: Jason Zweig is the personal finance columnist for The Wall Street Journal talking to us on this anniversary of Black Tuesday. Jason, thanks.

ZWEIG: Thank you. Transcript provided by NPR, Copyright NPR.