Just when it seemed like everything was coming up roses for the economy, the stock market crashed the party. The Dow Jones industrial average (an index that tracks 30 large U.S.-based companies) dropped 1,175 points on Monday and then, after recovering slightly, fell another 1,033 points Thursday.
That was a record! Well, sort of.
The 1,175-point drop was the largest one-day point drop in Dow history—and Thursday's drop was the second worst—but those rankings are actually pretty meaningless. What matters most is dollars, not points, so percent loss (or gain) is more relevant. Through that lens, even Monday’s drop was a less dramatic 4.6 percent, which isn’t even close to ranking among the market’s worst 20 days. To compete with Black Monday back in 1987, when the market lost 22 percent, the Dow would have needed to lose 5,614 points on Monday. To crack the top 10 worst days, it would have had to shed 2,000 points.
In other words, there have been plenty of other days when the market’s gyrated like this—and it only felt scary because we’ve been spoiled by a recent history with virtually no market volatility. In fact, the week's drop only took us back to where we were at the end of November.
So what’s next for the market?
Short term, we can’t say—no one can. (In fact, the market's been all over the place since Monday, closing higher on Tuesday before sliding again, then recovering again on Friday.) Anyone who tells you the market’s bottomed out can’t be sure; likewise, anyone saying it’s likely to drop more doesn’t know for certain, either.
What do we know for certain? Impulse-selling on down market days is a bad idea. You’ve officially locked in your losses. Moreover, bailing on the market emotionally only means you won't benefit when it recovers—you’ll be on the sidelines. And that could cost you more than you think.
While investors have enjoyed about 8-percent annual returns on average in recent decades, we mostly owe those gains to a few really good days. According to a Charles Schwab analysis, folks who missed just the top 10 trading days during a recent 20-year stretch would have seen their returns fall by almost half to 4.5 percent. Consider the top 20 days, and the returns drop to 2.1 percent.
Is there anything I can do?
Yeah, the same things you should always do as an investor: Stay focused on your end goal and hang in there. You can set aside money in a high-yield savings account that you expect to need very soon. For all other goals where time’s on your side, keep your emotions in check and stick with it. Remember: It’s not about timing the market, but time in the market.
This post has been updated.