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Some Thoughts About Monday’s Market Drop

The media reported that the Dow’s plunge of 1100 points on Monday was the biggest point drop in history. While that sounds scary, keep in mind that media reports are intended to be dramatic.  Put in broader perspective, the percentage drop (which is the more important measure) was 4.6%.  That’s the biggest single day loss since August 10th, 2011, but by far not the largest historically. The latter occurred on October 28th, 1929, when the Dow fell almost 13%.  In point terms that was a whopping 38 points. In other words, the Dow’s loss on Monday was almost four times greater than the entire valuation of the Dow 99 years ago.  What does all this suggest?  That over time the returns from investing in stocks far outweighs any losses from short term volatility.  A year from now no one will even remember what happened on February 5th 2018.

We‘ve been lulled by the fact that stock market volatility in 2017 has been lower than in any year in decades.  It’s easy to forget that when we invest in higher-returning assets such as stocks, the associated risk (or volatility) is also necessarily higher.  That’s one reason we diversify our portfolios across different types of assets: to manage the volatility so that it doesn’t cause us to make irrational decisions based on emotion.  Think that doesn’t happen? Bloomberg News reported the next day that clients of Vanguard, Fidelity, and Schwab all had problems accessing their accounts online due to excessive demand.

What caused the drop?

As I have written previously, the two factors that drive stock prices are expectations about company earnings and investor sentiment.  So at least one of those changed.  The reason behind the change is beyond my (or anyone’s) ability to determine.  Feel free to pick your own: interest rates; the new Fed chairman; Trump; stock valuations; profit taking.  In the end it makes no difference because it is unpredictable, especially in the short term.

What should you do?

If you are maintaining and managing the risk, cost, and taxation of a diversified portfolio designed to provide a level of growth that, if achieved, will maximize the likelihood that you will be able to do everything you want for the rest of your life, then you are already doing it.  There’s nothing more needed.

Tuning out the media may also be a useful thing to do, if only for stress reduction.



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