How likely is a 1987-style stock-market crash today? Likelier than you’d think.

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. One way of judging the researchers’ formula is by comparing the Dow Jones Industrial Average’s big drops over the past century with what that formula would have predicted. As you can see from the chart below, the formula has done an impressive job.

Because stock market gains and losses don’t adhere to a normal distribution, both investors and financial advisers are mistaken in thinking they can simply lower clients’ portfolio risk and proportionally reduce their returns. Instead, an “average” risk portfolio will have below-average performance.

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How likely is another 1987-like stock market crash? Maybe more than you think.There’s a one-in-five chance that over the next 30 years the U.S. market will suffer a 20%-plus single-day plunge
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Southwestern Energy’s stock surges on report of acquisition talks with Chesapeake EnergyWallace Witkowski came to MarketWatch from the Associated Press in New York, where he covered the business of Big Pharma, after covering FDA regulation of many of the same companies, as well as medical devices, in the Washington, D.C., area.
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