How To Think About Stock Market Declines

The headlines are often alarming and to the point: “Stock Down Sharply” or “Market Closes Lower After Tough Week” and so on.

Often, too, these types of headlines will attempt to quantify the declines with points lost, as if the stock market were a sport with a score to report. You see things like “Dow Falls 200 Points” or “Tech Stocks Show Biggest One-Day Points Drop in Years.”

Which is fair, if misleading. So let’s shed some light on what’s really driving these kinds of news agency pronouncements.

First off, the points decline can be meaningful or meaningless, depending on which index is being reported.

The Dow Jones Industrial Average is, at this writing, just over 34,000 points. What that means is that any point move of under 340 points or so is less than a 1% change in value.

The S&P 500 Index, meanwhile, is just above 4,000 points. It only takes a 40 point move to change the value by 1% in either direction.

The tech-centric NASDAQ currently runs at around 13,400 points, so look for changes on the order of 134 points to really move the needle there.

Some more responsible outlets take it upon themselves to talk about percentage moves for these indexes, but even so you occasionally get truly irresponsible fear-mongering from the news.

The worst example is taking a seemingly large move, say 500 points, and comparing it to a similar points move from decades ago. Sure, 500 points was a lot when the Dow was at 1,000 points total (a 50% decline!) but it just isn’t when the index is in the tens of thousands.

Another misleading headline appears when sectors are cherry-picked to make a small move seem more dramatic.

Usually, headline writers will track a small number of popular shares and focus on those and those only.

Thus you get headlines that suggest a bloodbath when really it’s a small slice of the market experiencing turbulence. That might be technology shares that are in vogue among active traders.

Yes, it hurts a lot of people when a widely held stock loses value, but that doesn’t mean the rest of the stock market is feeling the same pressure. The market as a whole might be up for the day.

Thus, if you owned only that handful of tech stocks, well, your portfolio maybe lost some ground. If you are reasonably diversified, however, the impact is likely to be muted.

Forgettable hiccup

Finally, remember that your retirement investments should be part of a years-long process. If your time horizon is retirement two decades away, a short-term drop in the markets will end up being a forgettable hiccup in a year and maybe even in a month’s time.

It’s also alarmingly easy to focus on market declines in the short run while ignoring or dismissing a steady climb over the previous year or years.

If a stock is up 150% since you bought it three years ago, does it matter that it might be down 2% today? Will you sell your holdings in a panic?

And what will you do once you sell and the share rebounds the following week? Buy it again?

Research shows that being out of the market for just the 10 “best” days over a five year period ending Dec. 31 2020 meant the difference between a $41,100 annualized return or just $18,829.

Which 10 days? It’s essentially impossible to know. It’s just simpler to diversify, stay invested and tune out the news if possible.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.