However, just like many numbers that are published on a daily basis, there's a lot more than meets the eye. In fact, despite the negative tones you hear on a regular basis from market commentators on television, this move is no reason to panic. In fact, most commentator’s comments are negative as we are drawn to negative news more so than good, and these individuals are in the business of views, reads, and clicks.
Here are three reasons you should not be worried about the recent market dip:
1. Historically speaking, this is not a major drop
Sure, headlines such as the "Dow Drops 832 Points" looks frightening, and commentators are quick to point out that it's the "third-largest" drop in history, but it's important to take a step back. The number 832 is high, but that is because the Dow is close to record highs. In terms of percentage, Wednesday's 3.3% drop really wasn’t that bad. In fact, it was not even close to being one of the worst percentage drops in history, and to put it in perspective, the Dow would have to drop more than 7% to even be in the top 20 of worst single day drops. 10 years ago, a 832 point drop would have equated to about a loss of 7.5% and not 3.3%, but that was because the Dow was hovering around 11,000 not 26,000.
The point: Don't get too worked up over dramatic-sounding headlines after the market drops. Swings of 3% (or more) in single trading days aren't exactly rare and large point drops are not as significant as they once were as the markets continue to grow. Drops have occurred many times throughout history and will certainly occur many times more in the future, do not stress!
2. Large moves up and down are part of a healthy stock market
Over the past 15 years, the worst time to invest would have been shortly before the financial crisis in 2008. If you invested $100,000 in the S&P 500 at the start of 2008, before the financial crisis hit, how much do you think your investment would be worth now? Hint: If just before the crisis hit and you pulled all your equities out and put it into bonds (a great move), and you’ve been too afraid to put the bonds back into equities since, you are behind.
Since January 1, 2008, the S&P 500 has experienced 17 of its 20 largest one-day point declines in history, including four days when it dropped by 7% or more. And that's on top of a steady downward trend during 2008 and part of 2009 when the index lost 54% of its value altogether. However, it might surprise you to learn that a $100,000 invested in the S&P 500 would have grown to more than $237,000 today. In other words, if you had invested in the stock market at the worst possible time in the past 15 years, you would have more than doubled your money. Further to this, if you were retired and relied on the cash flow your equities provide you (dividends), many dividend growing/paying companies continued their dividends. This means that not only did your investments double in a horrible period, but you did not have to sell any as the companies still provided you with your necessary cash flow. Moves like this are a normal part of a healthy stock market, and lots of money has been made over the years by long-term investors who largely ignore what the stock market is doing on a day-to-day basis.
3. Good stocks just went on sale
To be clear, I do not recommend buying stocks just because their prices went down. Having said that, if you believe in a company for the long run and the drop had nothing to do with the company's business or future potential, a stock market drop is like a sale. However, unlike in the consumer market, when good stocks are on sale, people not only tend to not purchase, but they in fact sell at the discount to shrewd investors understanding the above. If the quality of BMW cars was the same and all of a sudden they went on a 40% sales, how many of us would run for the “fences”? Likely not many. I for one would be down at the dealer immediately. The same should be true for companies such as Kraft Heinz that is down almost 30% this year with no fundamental changes. We should be running to buy, not staying away or selling.
All in all, here is why you should not stress nor worry:
- This wasn't even close to being one of the worst stock market drops in history.
- Even with big plunges like this occurring regularly, the stock market still generates excellent long-term returns and cash flow.
- Moves like this are opportunities to buy great stocks at a discount.