- On 5 August the Tokyo stock exchange suffered its biggest one-day fall since 1987, with the Nikkei losing more than 12%, and dragged down markets worldwide.
- Within days, much of the losses had been recovered: those who did not sell in panic saw the market recover within weeks.
- Leverage, that is, investing with borrowed money, multiplies gains and losses and forces selling when prices fall.
On 5 August 2024, the Tokyo stock exchange suffered its biggest one-day fall since 1987, with the Nikkei losing more than 12%, and dragged down markets around the world. The shock came after a few days of news that had made investors nervous, and it was experienced with an intensity reminiscent of other episodes of panic in financial history. Within days, much of the losses had been recovered.
Black Mondays leave striking images and dramatic headlines, but what is really useful about analysing them calmly is understanding what causes them and how those who go through them without damaging their wealth behave. The August 2024 episode is especially instructive because it combines a very specific technical mechanism, hidden leverage, with an equally clear behavioural lesson. Both aspects apply to any investor, whatever the size of their wealth.
What happened
A drop of that size in a single day, in one of the world’s main stock markets, is an exceptional event, and stock markets in other countries reacted in a chain, in a contagion that shows how connected markets are today. What happens on a Monday morning in Asia influences the opening in Europe and the United States hours later.
The quick recovery that followed does not erase the shock, but it does put it in perspective: the fall was more the consequence of forced movements of positions than of a radical change in the situation of companies. Markets can exaggerate in both directions, and that complicates the task of anyone trying to time each decision.
Hidden leverage
The episode showed how hidden leverage can amplify a correction. Leverage means investing with borrowed money: gains and losses are multiplied, and anyone who has to repay what was borrowed is forced to sell when prices fall. The forced selling, in turn, pushes prices lower still.
What makes it dangerous is that it cannot be seen at a glance. A portfolio can look moderate and yet be held up by debt in another currency, by derivatives or by loans secured on the assets themselves. When the market moves against it, the debt still has to be serviced, and that obligation turns an accounting loss into a real sale. Knowing one’s own level of indebtedness is an elementary form of prudence. Asking what would happen if the value of what one owns fell by a third, and whether the debt could still be serviced, is a good exercise.
Calm as a strategy
Those who did not sell in panic saw the market recover within weeks. Deciding under pressure tends to be costly: one sells when prices are low and buys back, if at all, when they have already risen. Episodes of panic, for all their drama, are rarely the best moment to take irreversible decisions. The discipline of not acting, when there is no reason to, is an active way of managing risk.
That is why it is worth having a plan defined in advance and reviewing it calmly, with an adviser, rather than in the middle of the storm. A good plan sets out what part of wealth can withstand swings, what part must be available at short notice and what would be done in the event of a sharp fall. This note is general information and not investment advice. Calm has value because it is prepared in advance.
Calm is also a strategy.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
