Critical Lessons Learned From the Stock Market Crash of 1929

 

Critical Lessons Learned From the Stock Market Crash of 1929

There are certainly numerous lessons to learn from the stock market crash of 1929 that can be invaluable in avoiding future market crashes.

In general, game-changing issues like high consumer and corporate debt (both of which were a big factor in the market crash of 2008 and the resulting recession), industries that went unregulated (like many banks in 1929) and rampant speculation by investors amidst soaring stock market prices are still in play today.

Here are some big takeaways from the 1929 stock market crash that remain important today:

• Avoid using leverage. A big problem in 1929 was that investors borrowed too much money to invest in the stock market, believing that the stock market would keep on rising and never decline. Big mistake. When the market did decline, creditors wanted their money back, but financially ailing investors were over-leveraged, and couldn't repay their loans. The lesson learned? Never borrow money for your investment account. If things go south in a hurry, you'll be glad you didn't overextend yourself with excessive borrowing.
• Stock market bubbles are all too real. Bubbles exist and investors need to pay attention. If stocks seem unrealistically high (former Federal Reserve Chairman Alan Greenspan referred to that scenario as "irrational exuberance") then it's time to practice some prudence and don't overpay for already pricey stocks.
• Market insiders may not have your best interests in mind. History shows us that in times of economic peril, it's everyone for themselves on Wall Street, and the average investor isn't usually a big priority. Think of the 2001 Enron scandal when company executives fraudulently inflated the firm's financial figures, which helped boost Enron's stock price. When the scam was revealed, Enron's stock plummeted, even as many executives, acting on insider knowledge that federal regulators were closing in, sold their shares. But the rank and file Enron employee who held company shares weren't so lucky and were left holding the bag when the stock plummeted.
• In economics, everything is linked together. One of the biggest lessons learned from the stock market crash of 1929 and the resulting Great Depression is that our major economic institutions - the stock market, banks, and the great American consumer - are bound together. When conditions deteriorate in any of those institutions, it's only a matter of time before the other institutions start sliding downhill, as well.

Overall, the stock market crash of 1929 represented the worst market downturn in U.S. history, with $30 billion lost in market value (a sum that would be worth $396 billion in 2018). It took decades for the nation to fully recover, and if nothing else, gave Americans some much-needed food for thought on big-ticket issues like money, economics, stock speculation, and investment risk going forward.