Thirty-six years ago, on Oct. 19, 1987, the U.S. stock market suffered its worst crash ever. That day, the Dow Jones Industrial Average DJIA lost 22.6%.
We know the odds of a crash because researchers several years ago derived a formula that successfully predicts the average frequency of stock market crashes over long periods of time. Insuring against a crash To be sure, the researchers’ formula doesn’t predict when crashes will occur, only their frequency over long periods of time. You might think that means you can’t plan for them. But that isn’t so, according to Nassim Taleb, a professor of Risk Engineering at New York University.
Taleb writes: “ecause of the Black Swan, … as hyper-conservative and hyper-aggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments… , you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasury bills… The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible .