Well, the market just closed with the US indices all down between 2.0% and 2.5%.
I have no doubt you’ll see headlines with “violent”, “tanking”, “plunge”, and “the ‘n’th worst day” over the weekend, but before you panic when you see the Dow Jones closed down 665 points, I want to offer a little perspective. Note: I highlight the Dow because most individual investors think of the Dow when they think about the US market, and it will be the index talked about because 665 is a big eye-catching number.
As an investor, you suffer from recency bias; it’s not your fault, it’s just how our mind and emotions work. Recency bias says investors associate the status quo with the most recent similar experience; so today’s 665 decline brings back memories of the declines we saw during the financial crisis of 2008. “This time is different” is usually not an acceptable response in investing, but in the case of today’s market activity, this time IS different.
In 2018, a 665 point loss on the Dow Jones is good for a 2.5% loss. In 2008, a 665 point loss on the Dow would have been a 7.0% loss. Yes, 665 is a big number. It might even take your breath away when you first see it, but when you take a step back and put into perspective, you can see it’s nowhere near the decline you equate it to.
Get Used To Big Numbers
I put together a couple of charts…they’re embarrassing when I think about the charts Nick at Of Dollars and Data creates, but they get my point across…
As markets continue to grow over time, investors need to get accustomed to seeing large numbers. As you can see in the first chart when the Dow grows, 600 point moves become lower percentage moves–when was the last time you really got nervous about a 2% loss in a day? Before long, 600 points will barely be a 1% move, which doesn’t even catch the most conservative investor’s attention.
Another way to look at it is by comparing what a 2% loss looked like at lower levels with what it will look like at future higher levels.
Who knows if today (and this week’s) market activity will lead to the long overdue correction every investment professional is looking for? I won’t pretend to act like I know–I’m glad I’m not a market pundit that tries to make a living making market predictions. What I do know is today’s decline is nowhere near the decline the media will make it seem like over the weekend—remember, the media’s job is to sell advertising and drive viewership/readers, not to tell investors what they really need to hear.
It’s Super Bowl weekend, Justin Timberlake is performing during the Half Time show, and we finally find out what happened to Jack Pearson (don’t hate–This Is Us is the one show my wife and I make sure we watch together every week)…why ruin all of that worrying about a 2% decline?
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.