Read This Before You React to Those Shocking Headlines About the Stock Market Dip
On August 14, 2019, the headlines were dire:
- “Dow Plummets 800 Points on Worsening Global Recession Fears” (Fox Business)
- “Dow Plummets More Than 800 Points on Recession Red Flag” (New York Post)
- “Dow Tanks 800 Points in Worst Day of 2019 After Bond Market Sends Recession Warning” (CNBC)
Those headlines are indeed alarming…but there was a complete disconnect between what had actually happened and what the headlines implied. The dip was normal. As the MarketWatch chart below shows, this market dip was nothing unusual—and less than what we see about every two months!
Market corrections 1928–2018:
- 5 percent—About every 2 months
- 10 percent—About every 8 months
- 20 percent—About every 30 months
The News Media Aim to Sell Advertising, Not to Educate
People often forget that the business of the news media is not to inform and educate, but rather to sell advertising. Whether they lean the left, right or center, media outlets must attract viewers and readers so they can sell advertising and make a profit. To do so, the media use sensational and often frightening headlines. The use of “click bait” is a widespread phenomenon on the internet. Click bait is content whose main purpose is to attract attention and encourage visitors to click on a link to a particular web page.
With the Dow Jones Industrial Average (DJIA) at 25,000 on August 14th, the drop of 800 points was less than 3.3 percent—again, something we see every few months! Just a 5 percent dip, which has been the average every two months for the past 90 years, would have been 1,250 points, or 50 percent more!
As of September 20, 2019, the DJIA was at 26,900. A normal dip for that number, of 10 percent, would be 2,690 points. You will notice that the media generally ignore the percentage change and rarely give any context. We expect to see 1,000-point swings and more in the coming year. Does that really matter? Only if you panic.
The Benefit of Keeping Your Emotions in Check
Dalbar, Inc., is an independent company that evaluates, audits and rates business practices, customer performance and service. Each year since 1994, Dalbar has conducted its Quantitative Analysis of Investor Behavior (QAIB) study to analyze investor returns. The company has consistently found that the average investor earns much less than market indices would suggest.
Hypothetical Growth of $100,000 over 20 years
Average Mutual Fund Investor – $214,220 Vs. Average Mutual Fund $346,8301.
Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (March 2019)
The average investor makes far less than the fund averages largely due to moving in and out of their investments at the wrong time. We are not suggesting someone blindly buy and hold, nor are we suggesting that you can time the markets. We recommend developing and monitoring an overall plan and making changes based on your needs or the overall allocation, rather than headlines or short-term fluctuations.
Panic and Poor Timing Can Cost You
People who panic during these normal dips and sell off their stocks pay a significant price for doing so. The average investor has given up almost half of his or her potential return over the past 20 years by engaging in self-destructive behaviors such as the following:
- Trying to time the market
- Chasing hot investments
- Abandoning their investment plans
- Reflexively avoiding out-of-favor areas
In March 2019, Dalbar found that the average investor was a net withdrawer of funds in 2018, but poor timing caused a loss of 9.42 percent on the year, compared to an S&P 500 index that retreated only 4.38 percent.
Stick to Your Plan
We have developed and refined a process that accounts for both short- and long-term volatility. The key is to stick with your plan. We expect increased volatility in the markets and even more dire comments and forecasts by the media as we approach the election next year. Those who have a comprehensive plan and stick with it should not be concerned about what lies ahead. Those who do not have a plan, or act emotionally, could pay a significant price for doing so.
Before you react to the headlines you read, take a deep breath, and remember that your well-developed financial plan is designed for performance over the long term.
We are here to help you. Our team has worked with clients for more than 30 years and has the experience, insight and expertise to guide you through what lies ahead. Please contact our team with questions or concerns, whether you are a client or ours or not. We are happy to provide a second opinion, without cost or obligation, even if you already have an established portfolio or plan. Carver Financial Services, Inc. 440-974-0808 or firstname.lastname@example.org.
1. Dalbar computed the Average Stock Fund Investor Return (above, “Driven by Emotions”) by using industry cash flow reports from the Investment Company Institute. The Average Stock Fund Return (above, “Emotions Held In Check”) figures represent the average return for all funds listed in Lipper’s U.S. Diversified Equity fund classification model. The average annual return for these two was 3.9% and 6.4% respectively.
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