PSA On Market Crashes Like This Week

First things first: Do. Nothing.

Because, as you might have heard, the US stock market plummeted yesterday.

The Dow Jones Industrial Average (DJIA) index, made up of the stocks of 30 major US companies, dropped by a record-setting 1,500 points before closing down 1,175 points on the day.

Another popularly-followed index comprising 80 percent of the US stock market, the S&P 500 index, saw its worst one-day performance since August 2011, dropping 4.1% on the day. UK, German, and Japanese stock markets indices all plunged yesterday between 1.5 and 2.5 percent, as global stock markets tend to correlate in the short run.

You may be asking questions like what caused this? What will happen next? And finally, what should I do about it, personally?

Let’s acknowledge the upsetting part of this before moving on to a more calm, appropriate reaction to yesterday’s fall, which itself followed on the heels of Friday’s devilish drop of 666 points in the DJIA.

The point-drop plunge in the DJIA yesterday dwarfed earlier record-setting one-day losses at the height of the 2008 financial crisis on September 29, 2008 (777 points), as well as the drop on the first day the market opened following the 9-11 attacks, September 17, 2001 (685 points).

Incidentally, the focus on a “points” change in a stock market index is a mistake, as hopefully, the 2001 and 2008 examples show. I’m making a math point, but an important one too-often ignored. We should only ever care about percent changes in indices. A 1,000 point plunge on the DJIA starting at around 10,000, such as we saw in 2001 and 2008, means the market was down 10 percent. A 1,000 drop in the DJIA starting at around 25,000 is just a 4 percent drop. Unpleasant, sure, but a more normal-sized occurrence. Yesterday and Friday were not 2008 and 2001-level drops in percentage terms, even if they involved more points on the DJIA.

Also, incidentally, the focus on one-day moves is almost always a mistake. Even after the last two trading sessions, the US market indices like the DJIA and S&P 500 are up over 21 percent and 15 percent respectively just in the past year, not counting dividends. My own rule is that if you invest in the stock market your shortest measurement for returns should be about 5 years. Focusing on the daily results will lead you astray.