Investing

Why Market Drops Shouldn’t Get You Down, Too

If you’ve been following along, it might seem like financial commentators and Chicken Little have a lot in common: They can’t stop talking about things falling.

The Dow Jones industrial average—or, casually, “the Dow”—has had a rough week. After making big gains on Monday, December 3, the index (which tracks 30 big company stocks, like Apple, McDonald’s and Intel) fell almost 800 points the next day. Stocks continued to bounce around for the rest of the week.

Analysts mostly attribute the decline to concerns that a potential trade deal with China may not be as good as President Trump suggested early in the week. (That means additional tariffs on thousands of Chinese-made goods are still a possibility in the new year, which could affect some companies’ profits and lead to higher prices on popular products we buy.)

Without context, a drop of 800 points might seem huge. After all, when’s the last time hundreds of anything seemed negligible to anyone but Jeff Bezos? But what’s important to remember today—and other days like this—is that, put in context, these numbers aren’t nearly so scary.

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To get some perspective, look at how far the Dow has come. Since its inception value of 40.94 in 1896, the Dow has risen more than 50,000 percent. (And you thought Drake started from the bottom!) In fact, it wasn’t until last year that the Dow crossed the 20,000 mark—meaning, even with its recent losses, it’s still up more than 20 percent from January 25, 2017.

As the Dow’s value increases, so, too, do the numbers required to make sizeable impacts to our investments. While an 800-point drop may have been a death blow a century ago, it’s not outside the realm of “normal” now. To break into the top 10 worst days in Dow history (in terms of percentage), it’d have to lose about 1,900 points. And to match 1987’s Black Monday, when the Dow shed 22 percent in a single day, we’d need a drop of more than 5,000 points.

Okay, so what should I do when the market drops?

The exact same thing you should when it doesn’t. Stay calm, and don’t make any emotionally driven changes to your investment strategy. A long-term mindset and well-diversified portfolio already takes moments like these into account—and the only way to lock in losses is to withdraw your money when the market drops.

Bottom line? Short-term jolts to the stock market are common, and every market downturn in history has ended in an upturn.

This post was updated on December 7, 2018

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