The Stock Market Soap Opera and Some Basic Math
The volatility of the stock market has become a major news story lately. But, as we well know, there is a tendency for the media to exaggerate. So, is the current stock market “crisis” real - or just a soap opera? And, if the “crisis” has substance, should it cause concern for retirement plan investors?
Let’s use some basic math to help us assess. Investors need to look beyond point value moves in the stock market and focus on percentage moves. Why is this? Well, stock market indices, such as the Dow Jones Industrial Average (DJIA, or simply the Dow), have grown fairly large—about 23,000 points, as this is written. Thus, if the market goes down by 230 points, it is only one percent of the index (230/23,000). In fact, if the market were to go down 1,000 points, it would still be less than 5% of the index. While this is a significant move for one day, it is nothing about which to be concerned, particularly for retirement plan investors who should be focused on how the market behaves over the course of years, not days.
To include some perspective, one of the worst single days in stock market history occurred on October 19, 1987. Known as “Black Monday,” the Dow lost 508 points - a full 22% of its value back then - on this infamous day! In today’s market, the Dow would have to drop over 5,000 points (23,000 x 0.22 = 5,060) to lose 22% of its value. Therefore, even a 1,000 point swing in the Dow (which, as of this writing, has only happened three times in its entire history; one being an advance, as opposed to a decline), should not cause widespread panic. Worrying about whether the Dow goes down 200, 500 or even 1,000 points in a single day’s session seems silly, particularly for long-term investors, such as those in retirement plans.
Having said that, there is data on the percentage side that supports the notion that the stock market has become particularly volatile as of late, despite the lack of major single day percentage moves (of the top 20 all-time single day percentage declines in the Dow, none have occurred since 2008). 2018 saw significant, though smaller, percentage moves (which we will define as changes to the Dow of 1% or more in a single day). More of these moves occurred just last month (December 2018), than in ALL of 2017. Now, 2017 was not a particularly volatile year, but this is a sign that volatility in the current market has increased significantly, hence the media stories.
So, what is a retirement investor to do? For most of us, the answer is to stay the course and maintain a properly diversified investment strategy, regardless of market performance, and avoid being reactionary to market events. A proper understanding of percentage movements in the market should help in this regard, as opposed letting the media narrative drive decisions.
Notice that we said, “for most.” Investors with liquidity needs, such as current retirees, may wish to discuss with their trusted advisor whether their needs would require a portfolio adjustment to reflect the increased volatility of the current marketplace. On the flip side, those just starting out with retirement plan investments generally need not be concerned about investments, as the vast majority of growth in their retirement accounts will be attributable to contributions.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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