It’s past time for some perspective on recent stock market volatility

Posted on September 7, 2007


As of 10:16 MDT, September 7, 2007, the Dow Jones Industrial Average has fallen 200.87 points, the NASDAQ is off 46.49 points, and the Standard & Poors 500 is off 20.64. Put into percentage terms (loss over the prior day’s closing value), the DJIA is down 1.50%, the NASDAQ is down 1.78%, and the S&P500 is down 1.40%. And yet, even though I have all of my retirement money presently tied up in various 401ks through Fidelity and Janus, I simply do not care.

200.87 points is a significant loss in absolute dollars, and it absolutely represents some real economic pain for people (although, given that the capital markets are more than just a little crazy these days, how much is fear and how much is real economic weakness is a very good question). And I know a number of investors who get very concerned about losses this large. But look again at that percentage: the loss is just 1.5%. Historically, changes of 1.5% happen pretty regularly, and it’s not until you start seeing really major percentage swings that we should be really concerned.

Between January 3, 1900 and February 24, 2006 (the data set I was able to get from here), there were 1570 days where loss was 1.5% or more, for an average of 1 day out of every 18 days when the loss was at least 1.5%. But the true economic downturns have been presaged by significantly larger losses. The start of World War I led to the largest percentage loss on record, 23.52%, yet that loss was only 16.8 points. The Stock Market Crash of 1929 saw a 12.82% drop on October 28 that led to Black Tuesday the next day. Black Monday (October 19, 1987) was a loss of 22.61%, but that was 508 points – In October, 1987, a 1.5% loss would have been about 36 points. And the recession caused by the 9/11 attacks was presaged by a drop of 684.81 points (“only” 7.13%) on September 17, 2001 – even at the end of that week, after a drop of more than 14% for the week, a loss of 1.5% represented about 123 points.

If you’re an active, day-by-day investor, a loss of 200.87 points (that may go up or down by the time the markets close this afternoon) matters because you’re probably trading all the time and making money on a change of a dime or a nickel on tens of thousands of shares. Fine, you’re losing a fortune betting on the volatility of the market. But if you’re in the market for the long run like most people are, betting their retirement on long-term national and/or global economic growth, 1.5% is nothing. And stressing out over a loss of 200 points in a single day is just going to drive you crazy.

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