To those who have not been investing for a long time, the prospect of the Dow Jones Industrial Average falling 5,700 points in one day may seem ridiculous. But is it?

On Black Monday, 31 years from last Friday, the Dow Jones Industrial Average DJIA, fell about 23%. If the same percentage drop were to happen today, it would be about 5,700 points. I lost millions that day, and so did many others. Of course, today is not 1987.

Some of the most dangerous words in investing are “this time it’s different.” Basic human emotions of greed and fear that drive the markets do not change. Let’s explore this issue with two charts.

Two charts

Please click here for six differences between now and 1987.

Please click here for six similarities between now and 1987.

Here are the biggest dangers to the stock market that can precipitate a quick, big decline.

• The popularity of passive investing. Broad-based ETFs such as S&P 500 ETF SPY, Nasdaq 100 ETF QQQ, and small-cap ETF IWM, are popular. There is unshakable faith among many that the long-term buy-and-hold approach cannot lose. They cite 100 years’ worth of data. But much of the same data was available in 1987. Do you really know that the next 50 years will be similar to the last 50 years?

• A Federal Reserve policy mistake.

• Over-ownership of stocks such as Apple AAPL, Facebook FB,   Amazon AMZN, and other large-cap tech stocks.

• Geopolitics.

Arora’s Second Law of Investing

Investors ought to pay attention to Arora’s Second Law of Investing: “No one knows with certainty what is going to happen next.” The best thing investors can do is rely on probabilities. To figure out the probabilities, at The Arora Report we rely on the ZYX Global Multi Asset Allocation Model with 10 inputs. Please click here for detail of the 10 inputs. The model has a proven track record in both bull and bear markets. In 2008, when most portfolios lost one-half of their value, The Arora Report produced a 45.9% return. This was accomplished through inverse ETFs, hedges and cash.

Right now the model gives a low probability of a crash. Nonetheless, some defensive measures are warranted while holding good positions because the bull market is long in the tooth, valuations are high, interest rates are rising and earnings growth is slowing.

Read more at MarketWatch.

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