When the Dow Jones industrial average finished its 1,175-point drop on Monday, Peter in Seattle checked the balance in his 401(k) plan. He had lost roughly $12,000 on the day. He was scared.
Jack in Braintree, Mass. — a 20-something who has worked hard to start his savings and investment accounts — looked at his accounts and said “this is the worst day of investing I have had in my life.” His accounts were down about $500.
Ladies and gentlemen, please welcome volatility back to the stock market.
Lost amid the easy move up of 2017 and the hot start to record highs in January was that the market had gotten, well, boring. Last October, it blew past the longest streak ever for the Standard & Poor’s 500 without a 3 percent drawdown; the previous record of 241 trading days had been set in 1966.
The new streak lasted more than a calendar year. The S&P also had its longest streak of consecutive days without a 0.5 percent drop in 20 years. All of that building put the indexes at record highs, levels that also make point drops less meaningful.
On the way up, we watched the Dow move from 25,000 to 26,000 in days, but that 1,000-point increase represented just a 4 percent gain. That’s a lot different from the 1,000-point gain that moved the Dow from 9,000 through 10,000 years ago, because that 1K increase represented an increase of more than 10 percent.
That’s why Jack’s worry about the “worst day” was based on misleading headlines and calculations. Yes, the news organizations were touting the “worst decline in history,” but that was the worst point drop. The 1,175 points were more than double the point decline experienced during Black Monday 1987, the actual “worst day” any living investor has ever experienced.
The Dow lost “just” 508 points on that fateful day 30 years ago, but those points represented a 22.6 percent decline; that’s nearly five times worse than what the market dished out on Monday.
Translate that to the 401(k) of Peter in Seattle and his paper loss would have been about $60,000. Suddenly, Monday’s decline seems a lot less scary.
So here are some things to consider as volatility comes back to the market and the current whipsaw plays out:
Do look at your portfolio. Plenty of experts advise against peeking at long-term investments when the market makes short-term swings, but a peek now makes some sense.
Consider both Peter and Jack; if the daily swings in the market are so large that they worry that they can’t ride out any downturn to reach their long-term goals, then it may be time to change their allocation, take some risk off the table and give themselves some peace of mind.
That may not be the best thing from a long-term perspective, but a reasoned move now is better than a panicked move later.
Do the math. Yes, a $12,000 loss in his retirement savings in a day looks ugly to Peter. But he amassed much of his $300,000 account while the market was rising and he never once felt like “the market is too volatile” while it was quickly pushing his balance up.
Likewise, Jack crossed the $10,000 mark in his young portfolio with significant help from a market that was returning more than he expected.
The returns on his investments are still much higher than he would have expected for the few years he has been setting money aside; he would have been happy with returns closer to historic norms (10 percent in large-cap stocks), so the only problem he’s really having is that he hates to see returns “normalize” because that means the froth is being removed from his cup that had been running over.
Don’t fight the machines. A huge chunk of Wall Street trading is triggered by machines that are trying to outmaneuver competing computers.
There’s no denying that market swings can be caused by this kind of trading, and the fact that Monday’s decline saw so many Dow stocks falling large percentages in lockstep could signal that it was more computer-driven than money managers making conscious decisions to get out.
Your goal is to capture the long-term trend of the market. Trying to win minute-by-minute is a pretty sure way to lose over time.
This isn’t a test of the market, it’s a test of your nerve. The market has no emotions. It does what it does. Steep drops, corrections, downturns and bear markets haven’t been repealed. If you are honest with yourself, you always knew this was going to happen, again. This is where you look at your plan and make sure it still makes sense.