The Dow Jones industrial average lost 1,175 points today—an all-time record. In Dow points, the loss was more than twice the 508 points the average plunged in the 1987 crash. Yet because of the much greater valuation of the Dow today compared to 1987, this loss is much more modest. Today’s loss was only 4.6% while the 1987 loss was a stunning 22.6%. I was 25 years old at the time and panicked a bit and sold. The market recovered and then I bought back into the market, missing most of the gain from the recovery. I remind myself of this every time I want to run away from the market when it goes down.
What does Monday’s collapse mean for the future? Since 1946, the Dow has fallen more than 4.6% in a single day 30 times. On average, the Dow rose 1% the next day and was higher two-thirds of the time.
But let’s not sugar coat things.The Dow is now down 1.5% for the year and is 8.5% below its January 26 high. The fall has been unusually rapid.
Stocks almost never fall into a bear market unless the economy is approaching a recession. And right now, the U.S. economy and economies around the world are quite strong. At the same time, stocks are still quite expensive relative to their earnings and sales. And in some instances, a collapse in the stock market has triggered a recession.
In short, we don’t know what will happen to stocks tomorrow, over the next year or over the next five years. That’s why your portfolio contains a substantial weighting in bonds, even though they're paying very little in dividends. Look at your short-term money (your cash) and your midterm money (your bonds) and make sure that to your mind you have sufficient safe money to whether any stock market storms. We work very hard to balance your safe money with the stocks that are needed to give you the growth you need so that you do not outlive your money. Please call or email if you want to talk about your investments and how we have safeguarded the money that you need for the short term.
Thank you to my good friend Steve Goldberg at Kiplingers for his insights into the market today.