The year started off with a bang in the markets! It seemed like the economy was slated for more growth and the stocks could do no wrong – until they did. The Dow Jones industrial average (an index that tracks 30 large U.S.-based companies) dropped 1,175 points last Monday and then, after rebounding a bit, fell another 1,033 points last Thursday. I was in Shanghai, China at the time, having a blast with some of my close friends. The news really didn’t alarm me because well, this isn’t my first rodeo and we have all seen this before,
The 1,175-point drop was the largest one-day point drop in Dow history—and last Thursday’s drop was the second worst—but when you compare those rankings in the grand scheme of things, they don’t really mean that much. We cant be confused by the mass craze in media, that’s what they do.
What matters most is how much was lost from a dollars and cents perspective, not points. From that vantage point, last Monday’s drop was a mere 4.6 percent, which isn’t even close to ranking among the market’s worst 20 days. To even come close to Black Monday back in 1987, when the market lost 22 percent, the Dow would have needed to lose 5,614 points last Monday. To even be among the top 10 worst days, it would have had to drop by 2,000 points.
What I am basically saying is, this isn’t anything new. This has happened time and time again throughout history. The reality is the markets have been up consistently with relatively no real volatility for some time now. This so-called major drop just took us back to where we were in November.
At this very moment, it’s hard to say. Anyone that is spewing of predictions is just guessing at best. We don’t know if its all up from here, or if markets will fall further. What we can say is that getting scared and selling now, is one of the worst things you can do. You will lock in your loses and on top of that, won’t be able to benefit when stocks rebound. You cant win a game from the sidelines, period.
Investors have seen roughly an 8-percent annual return on average in recent decades, but, we mostly owe those gains to a few really good days. According to a Charles Schwab analysis, folks who missed just the top 10 trading days during a recent 20-year stretch would have seen their returns fall by almost half to 4.5 percent. Consider the top 20 days, and the returns drop to 2.1 percent.
What should you do?
Stay focused on your long-term goals. If you have some money invested that you expect to need in the short-term, it may make sense to position it in any high-yield savings account that you expect to need very soon (if you can find one). If your other goals are long-term in nature, Don’t get emotional and weather the storm. Look at it like this, if Lamborghinis suddenly went on sale, no would say its time to run away from Lamborghinis, they would say, this is my chance to buy one. When stocks fall, given that historically they always rise after a downturn, you have to approach it with the same mindset. Things are down right now, but they will be going back up, let me get some before that happens. To put it in perspective, if you were to invest in the S&P 500 once the market bottomed out in March of 2009, today, you would have had a 265% return. Guess what though, no one can time the market, so the best place to be, is in it. Remember, it’s not about timing the market, but time in the market.